A Behavioral Accounting Study of Strategic Interaction in a Tax Compliance Game

Chung K. Kim and William S. Waller ()
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Chung K. Kim: Ewha Womans University
William S. Waller: University of Arizona

Chapter Chapter 2 in Experimental Business Research, 2005, pp 35-56 from Springer

Abstract: Abstract This paper reports an experiment on a tax compliance game based on the model of Graetz, Reinganum, and Wilde (1986). A model implication is that the audit rate, β, is insensitive to the proportion of strategic versus ethical taxpayers, ρ. Our hypotheses contrarily predict that auditors with limited rationality use ρ as a cue for adjusting β. The hypotheses assume a simple additive process: β = β′ + β″, where β′ depends on ρ, and β″ depends on a belief about the taxpayer’s strategy. The results show positive associations between ρ and β′, and between auditors’ uncertainty about ρ and β′. The auditors formed incorrect beliefs about the taxpayers’ responses, which affected β″. The auditors incorrectly believed that the taxpayers increased the rate of under-reporting income as ρ increased, and that the taxpayers expected a higher audit rate when the auditors faced uncertainty about ρ. The taxpayers correctly believed that β increased as ρ increased, and responded by decreasing the rate of under-reporting income.

Keywords: Limited Rationality; Strategic Interaction; Strategy Choice; Versus Versus Versus Versus Versus; Audit Rate (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-24244-6_2

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DOI: 10.1007/0-387-24244-9_2

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