The Effect of Tax Transparency on Consumer and Firm Behavior: Experimental Evidence

Abstract

Tax avoidance among large multinational corporations has considerably increased in recent years, triggering an intense discussion about how to ensure that all pay their 'fair share'. We propose a novel experimental design to incentive-compatibly model the firm-consumer relationship in a consumer goods market. This new paradigm allows us to analyze the effect of increased tax transparency on consumer and firm behavior in a dynamic framework. We find that absent the threat of being directly exposed as a tax avoiding firm, only 26% of the firms decide to pay taxes. Once tax avoiding firms are identifiable in the market, this rate rises to 58%. Providing market participants additionally with information about the social costs of tax avoidance increases the fraction of tax paying firms further to 74%. We observe that these improvements are the consequence of firms proactively deciding to pay taxes. At the highest level of transparency, we further observe that consumers show a stronger proclivity to boycott tax avoiding firms, even if these firms offer cheaper prices.

Keywords: economic experiment, public good dilemma, corporate tax avoidance, consumer behavior, firm behavior

JEL Classification: C9, C92, H26