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

37 Pages Posted: 28 May 2012 Last revised: 25 Feb 2013

Andrew T. Hayashi

University of Virginia - School of Law

Brent K. Nakamura

University of California, Berkeley

David Gamage

Indiana University Maurer School of Law

Date Written: May 25, 2012

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.

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

JEL Classification: C91, D03, H20, J22

Suggested Citation

Hayashi, Andrew T. and Nakamura, Brent K. and Gamage, David, Experimental Evidence of Tax Salience and the Labor-Leisure Decision: Anchoring, Tax Aversion, or Complexity? (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. Available at SSRN: https://ssrn.com/abstract=2067157 or http://dx.doi.org/10.2139/ssrn.2067157

Andrew T. Hayashi (Contact Author)

University of Virginia - School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Brent K. Nakamura

University of California, Berkeley ( email )

Jurisprudence and Social Policy Program
2240 Piedmont Avenue
Berkeley, CA 94720-2150
United States

David Gamage

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

HOME PAGE: http://www.law.indiana.edu/about/people/bio.php?name=gamage-david

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