The Value of Honesty: Empirical Estimates from the Case of the Missing Children

38 Pages Posted: 24 Jul 2011

See all articles by Sara LaLumia

Sara LaLumia

Williams College - Department of Economics

James Sallee

University of Michigan at Ann Arbor

Date Written: July 2011

Abstract

How much are people willing to forego to be honest, to follow the rules? When people do break the rules, what can standard data sources tell us about their behavior? Standard economic models of crime typically assume that individuals are indifferent to dishonesty, so that they will cheat or lie as long as the expected pecuniary benefits exceed the expected costs of being caught and punished. We investigate this presumption by studying the response to a change in tax reporting rules that made it much more difficult for taxpayers to evade taxes by inappropriately claiming additional dependents. The policy reform induced a substantial reduction in the number of dependents claimed, which indicates that many filers had been cheating before the reform. Yet, the number of filers who availed themselves of this evasion opportunity is dwarfed by the number of filers who passed up substantial tax savings by not claiming extra dependents. By declining the opportunity to cheat, these taxpayers reveal information about their willingness to pay to be honest. We present a novel method for inferring the characteristics of taxpayers in the absence of audit data. Our analysis suggests both that this willingness to pay to be honest is large on average and that it varies significantly across the population of taxpayers.

Suggested Citation

LaLumia, Sara and Sallee, James, The Value of Honesty: Empirical Estimates from the Case of the Missing Children (July 2011). NBER Working Paper No. w17247. Available at SSRN: https://ssrn.com/abstract=1893391

Sara LaLumia

Williams College - Department of Economics ( email )

Fernald House
Williamstown, MA 01267
United States

James Sallee (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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