Endogenous Crackdowns, Information Disclosure, and Tax Compliance: An Experimental Investigation

Abstract

Crackdowns have been widely recognized as an efficient means of deterrence. However, existing studies investigate only exogenous crackdowns. To fill this gap, we design an experiment in the context of tax evasion to analyze the efficacy of endogenous crackdowns, that is, sudden and dramatic increases of audit probability triggered by a low level of compliance. Our experimental results show that: (a) subjects react quickly to comply when crackdowns occur; (b) subjects report more than half their income even during non-crackdown periods; (c) announcements of crackdowns significantly increase tax compliance both when crackdowns are pre-announced and when they are announced ex post; and (d) subjects are able to coordinate quickly to end crackdowns. Our results may have important implications for policymakers in terms of designing more effective crackdown policies.

Keywords: Crackdown, announcement, tax evasion, experiment

JEL Classification: C91, H26