Compliance and the Subjective Audit Probability

30 Pages Posted: 13 Dec 2011 Last revised: 3 Dec 2012

See all articles by Kai A. Konrad

Kai A. Konrad

Max Planck Institute for Tax Law and Public Finance; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

Tim Lohse

Berlin School of Economics and Law; Max Planck Institute for Tax Law and Public Finance

Salmai Qari

German Institute for Economic Research (DIW Berlin); Berlin School of Economics and Law

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Date Written: December 1, 2011

Abstract

This paper studies the role of beliefs about how own appearance and performance affect the subjective probability of being audited in a compliance situation, e.g. at customs. In an experiment in which underreporting has a higher expected payoff than truthful reporting we find an increase in compliance of about 80% if subjects have reason to believe that their appearance or performance influences their subjective audit probability. We find that higher compliance is driven by subjective beliefs, rather than by social and psychological effects of personal contact. In contrast, we do not find evidence for individuals who believe that their personal performance can reduce the subjective probability of an audit. Our results suggest that individuals’ beliefs about their subjective audit probability are important. An institutional framework with personal contact and with discretion about whom to audit can therefore improve compliance.

Keywords: Compliance, tax evasion, audit probability, customs, second-order beliefs

JEL Classification: H26, H31, C91

Suggested Citation

Konrad, Kai A. and Lohse, Tim and Qari, Salmai, Compliance and the Subjective Audit Probability (December 1, 2011). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2011-18, Available at SSRN: https://ssrn.com/abstract=1971605 or http://dx.doi.org/10.2139/ssrn.1971605

Kai A. Konrad (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

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Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/home.cfm

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

IZA Institute of Labor Economics

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Bonn, 53072
Germany

Tim Lohse

Berlin School of Economics and Law ( email )

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Berlin, D-10825
Germany

HOME PAGE: http://www.hwr-berlin.de/en/prof/tim-lohse

Max Planck Institute for Tax Law and Public Finance

Marstallplatz 1
Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/public_economics/research_affiliates/tim_lohse.cfm

Salmai Qari

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825
Germany

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