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A Behavioral Laffer Curve: Emergence of a Social Norm of Fairness in a Real Effort Experiment

Louis Lévy-Garboua (), David Masclet and Claude Montmarquette ()

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: This paper demonstrates, through a controlled experiment, that the "Laffer curve" phenomenon does not always reflect a conventional income - leisure trade-off. Whether out of reason or out of emotion, taxpayers may also be willing to punish intentionally unfair tax setters by working less than they would under the same exogenous circumstances. We conduct a real effort experiment in which a player A (the "tax receiver") is matched with a player B (the "worker") to elicit the conditions under which tax revenues will increase under a certain threshold and decrease thereafter. We ran four different treatments by manipulating work opportunities and the power to tax. Consistent with the history of tax revolts, the working partner overreacts to the perceived unfairness of taxation when the tax rate exceeds 50%, most strongly so in the high effort treatment. With two types of players, selfish and empathic, our model predicts the emergence of a social norm of fairness under asymmetric information, and elicits the optimal and emotional patterns of punishments and rewards consistent with the norm's enforcement. The social norm allows players to coordinate tacitly on a "focal equilibrium", which offers a solution to the indeterminacy raised by the Folk theorem for infinitely-repeated games and a behavioral justification for the tit-for-tat strategy. The social norm of fairness enhances productive efficiency in the long run.

Keywords: Taxation and labor supply; Laffer curve; experimental economics; fairness and efficiency; social norms and sanctions; informational asymmetry; emotions (search for similar items in EconPapers)
Date: 2009-04
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00350260
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Published in Journal of Economic Psychology, Elsevier, 2009, 30 (2), pp.147-161. ⟨10.1016/j.joep.2008.09.002⟩

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Journal Article: A behavioral Laffer curve: Emergence of a social norm of fairness in a real effort experiment (2009) Downloads
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