Deterrence Effects of Auditing Rules: An Experimental Study
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Abstract
| This paper examines the deterrence effect of two auditing rules via a laboratory experiment. A traditional rule which is usually assumed in the auditing literature neglects resource constraint in reality. A bounded rule proposed in this paper takes into account the capacity of the auditor. The basic experimental setting follows a classic tax compliance game in which each taxpayer is endowed with either a high- or low-income with certain probability. On knowing an auditing rule, they have to decide simultaneously and independently whether to report their income truthfully to the tax authority. The traditional rule audits every low-income report with a constant probability. The bounded rule audits a random selected sample of low-income reports whenever the number of these reports exceeds audit capacity, or otherwise all of the reports. The experimental evidence suggests that, as predicted, the two auditing rules have the same deterrence effect. Moreover, the bounded rule is more cost-effective since it commits fewer resources and conducts fewer audits. The results provide support for the bounded rule as a more cost-effective alternative to the traditional rule. |
| Fangfang Tan is a PhD Candidate in the Department of Economics at Tilburg University. Before studying in Tilburg, she holds a B.A. degree in Economics from Zhejiang University and an M.Phil. degree in Economics from CentER, Tilburg University. Her research interests are largely in the area of public economics and industrial organization, such as the influence of productivity heterogeneity on public goods provision, mechanisms to increase cooperation in social dilemma, and the impact of group decision makers on market performance. Moreover, she is also interested in incorporating results in experiments and behavioral economics to public policy and mechanism design. For instance, how to design policies and mechanisms that align individual incentives and behavior with the underlying goals? In particular, she uses experiment as a tool to study and compare the effectiveness of various auditing rules in a tax compliance game. |
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