When Tax Enforcement Changes: Social Learning and Compliance

Jingnan Chen, Yixin Chen, Zhixin Dai, Tianqi Wei and Su Yang
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Jingnan Chen: Department of Economics, University of Exeter
Yixin Chen: Central University of Finance and Economics
Zhixin Dai: School of Finance, Renmin University of China
Tianqi Wei: China University of Political Science and Law
Su Yang: Renmin University of China

No 2610, Discussion Papers from University of Exeter, Department of Economics

Abstract: Taxpayers rarely observe audit probabilities and must infer changes in enforcement from personal and social experience. We study this process in a laboratory tax-reporting experiment with 568 participants. Each participant faces hidden audit probabilities of 5 percent and 25 percent in randomized order, and we vary peer information across sessions from none to one or two preceding audit outcomes in a sparse network and three in a dense network. Before any peer outcome is transmitted, assignment to either network raises compliance by about 20% relative to no peer information. Once outcomes circulate, compliance in the dense network is approximately twice as responsive to enforcement as without peer information and about 60% more responsive than in the sparse network. This amplification is directional: relative to no peer information, the dense network raises compliance by about 12% after enforcement strengthens but lowers it by about 25% after enforcement weakens. Elicited belief distributions show that broader information reach improves learning about the changed enforcement environment. Higher perceived audit probabilities predict greater subsequent compliance, and the dense network's advantage comes from accumulating more peer signals rather than weighting each signal more heavily. Counterfactual policy exercises show that broader diffusion can reinforce deterrence under strong enforcement but erode it under weak enforcement; a model-based exercise suggests that full disclosure of the audit probability can reduce compliance under both weak and strong enforcement.

Keywords: tax compliance; tax enforcement; social learning; information networks; subjective beliefs (search for similar items in EconPapers)
JEL-codes: C91 D83 H26 (search for similar items in EconPapers)
Date: 2026-07-31
New Economics Papers: this item is included in nep-exp and nep-iue
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