Cooperation under the Risk of Capture: Why Citizens Pay Taxes That Can Be Embezzled

Abstract

Why do citizens pay hard-to-enforce local taxes, if public funds are likely to be embezzled? Evidence from behavioral experiments with village residents in Tanzania suggests that local norms of moderation in embezzlement can facilitate voluntary contributions to public goods. In villages where greater moderation in embezzlement can be expected, citizens' contribution preferences are less sensitive to the possibility that their contributions can be embezzled. Voluntary moderation in embezzlement can be explained by several behavioral mechanisms, including in-group solidarity, reciprocity, and norms of trusteeship. The findings have important implications for our understanding of tax compliance and public goods provision in situations where limited enforcement capacity coincides with weak public accountability.

Keywords: Informal Taxation, Tax Compliance, Corruption, Public Goods, Experiment

JEL Classification: C92, C93, D73, H26, H27, H41, O17