Experimental Evidence of Tax Salience and the Labor-Leisure Decision: Anchoring, Tax Aversion, or Complexity?

Abstract:     
Recent research in marketing and public economics suggests that consumers underestimate the effects of taxes and surcharges on total purchase prices when taxes and surcharges are made less salient. The leading explanation is that consumers anchor on base prices and underadjust for surcharges. We perform experiments that: extend the tax salience and price partitioning literatures to the labor supply context; test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work; and test whether responses to price partitioning result from imperfect calculation of all-inclusive prices or from deeper preferences. We reject the anchoring hypothesis and find that subjects are less willing to work both when their wages are partitioned with positive and with negative surcharge components. We also find evidence that partitioned pricing effects result from cognitive limitations and possibly from responses to complexity.

Number of Pages in PDF File: 37

Keywords: experiment, framing, partitioned pricing, labor supply, taxation, tax salience

JEL Classification: C91, D03, H20, J22

Accepted Paper Series