Salience and Taxation: Salience Effect vs. Knowledge Effect

9 Pages Posted: 6 Nov 2012

See all articles by Yuqing Zheng

Yuqing Zheng

University of Kentucky - College of Agriculture - Department of Agricultural Economics

Edward W. McLaughlin

Cornell University - School of Applied Economics and Management

Harry M. Kaiser

Cornell University - School of Applied Economics and Management

Date Written: November 5, 2012

Abstract

Posting tax-inclusive price tags on grocery products can reduce demand through an information effect that corrects consumers who misperceive the actual tax status. We disentangle the information effect from the salience effect developed by Chetty, Looney, and Kroft (2009, CLK for short). By utilizing CLK’s survey finding that 20% of shoppers mistakenly think there is no sales tax on toothpaste, we show that the information effect actually explains 31% of the sales drop in CLK’s field study. Therefore, ignoring the information effect may overestimate the salience effect by a large degree.

Keywords: demand, information effect, sales tax, salience effect, taxation

JEL Classification: H71, H25, D12

Suggested Citation

Zheng, Yuqing and McLaughlin, Edward W. and Kaiser, Harry M., Salience and Taxation: Salience Effect vs. Knowledge Effect (November 5, 2012). Applied Economics Letters, Vol. 20, No. 5, 2013 (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2171257

Yuqing Zheng (Contact Author)

University of Kentucky - College of Agriculture - Department of Agricultural Economics ( email )

Lexington, KY 40546
United States

Edward W. McLaughlin

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States
607-255-3169 (Phone)
607-255-4776 (Fax)

Harry M. Kaiser

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States
607-255-1598 (Phone)
607-254-4335 (Fax)

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