Extending the lessons of laboratory experiments on tax compliance to managerial and decision economics

Abstract

In this paper we examine what experiments on tax compliance have revealed about compliance behavior, and we discuss what these experiments can reveal about managerial and decision economics. We draw two general conclusions from this discussion. First, compliance is a complicated decision, one that depends upon the financial incentives facing the decision‐maker, including detection and punishment, but one that also depends upon many other factors that have not been considered by the standard economics‐of‐crime paradigm. Second, and as a consequence, broader approaches to the compliance decision are needed, ones that involve enforcement but that also encompass more complete models of behavior. Put differently, any company strategy based only on detection and punishment may well be a reasonable starting point for compliance but not a good ending point. Instead, what is needed is a multi‐faceted approach that emphasizes enforcement, but that also emphasizes the broad range of motivations that explain why people obey rules and regulations. © 1998 John Wiley & Sons, Ltd.

The Impact of Threat of Punishment on Tax Compliance and Non-compliance Attitudes in Malaysia

“…The economic deterrence approach was developed based on the economics-of-crime model, introduced by Becker (1968) to optimize the public and private policies in fighting illegal behavior since threats of punishment are expected to encourage lawful behavior. Basically, it is assumed that the tax compliance decision is made by a taxpayer under uncertain circumstances, strictly due to the fear of the possibility of being caught and penalized (Alm & McKee, 1998).…”

The Impact of Monitoring and Sanctions on Cheating: Experimental Evidence from Tunisia

“…Using a laboratory experiment in a developing country (Tunisia), we investigated the effect of monitoring and monetary/moral sanctions on cheating. Even if results from experiments must be considered with caution in real-world settings, Alm and McKee (1998) argued that many of the results from laboratory experiments regarding tax compliance or evasion are directly applicable to organizational compliance with regulations and compliance with regulations within organizations. In the same line, we contend our experiment offers several valuable managerial insights.…”

Regulatory enforcement with competitive endogenous audit mechanisms

“…For example, Harrington (1988) writes, "In a static analysis there is no way for the agency and the firm to react to each other's actions." Further, this literature asserts that dynamic audit models provide a better explanation for the compliance "puzzle," the stylized fact that actual compliance rates are high even though audit rates and expected penalties are low (see Alm and McKee, 1998;Harrington, 1988). Our article takes an alternative position, namely that (static) competitive endogenous audit mechanisms based on relative evaluation generate strong incentives for compliance and may provide a better explanation for the compliance puzzle.Many regulations require agents to disclose information, where such disclosure will ultimately lead to increased costs, such as the levels of activities that are subject to taxation, or report information that may cause a negative market reaction.…”