Experimental Evidence of Tax Salience and the Labor-Leisure Decision: Anchoring, Tax Aversion, or Complexity?
Andrew T. Hayashi
University of Virginia - School of Law
Brent K. Nakamura
University of California, Berkeley
Indiana University Maurer School of Law
May 25, 2012
Public Finance Review, Vol. 41, pp. 203, 2013
UC Berkeley Public Law Research Paper No. 2067157
NYU Law and Economics Research Paper No. 12-14
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
Date posted: May 28, 2012 ; Last revised: February 25, 2013