Catch Me If You Can: Testing the reduction of compound lotteries axiom in a tax compliance experiment

Michele Bernasconi and Juliana Bernhofer

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2020, vol. 84, issue C

Abstract: We test the Reduction of Compound Lotteries Axiom (RCLA) in an experiment on tax compliance. We disentangle the compound probability of audit and detection and test it against a more realistic situation with a probability of audit and a subsequent probability of detection. Various experiments have shown that abstract framing often leads to violations of the RCLA; our framed set-up also reveals statistically significant departures from the RCLA. We find that subjects comply more in the two-stage lottery set-up than they do in the one-stage equivalent and that violations are compatible with subjects applying different weighting functions to one-stage lotteries versus two-stage lotteries: inverse S-shaped - likelihood insensitive - in the former set-up; and significantly less insensitive in the latter. Violations substantially decline with subjects’ experience but not at the same rate for all groups of subjects.

Keywords: Reduction of compound lotteries; Rank dependent utility; Bomb crater effect; Laboratory experiments (search for similar items in EconPapers)
JEL-codes: C91 D03 H26 J16 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceco:v:84:y:2020:i:c:s2214804319301223

DOI: 10.1016/j.socec.2019.101479

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