You are about to take part in an experiment on economic decision-making. For having shown up on time, you will receive 3 Euros at the end of the experiment. If you have any doubt during the experiment, please address a lab assistant by raising your hand. In case you use the computer for activities not strictly tied to the experiment, you will be excluded from taking part in the experiment and from any payment.
Hereunder, you will find the instructions regarding the exact proceeding of the experiment. Please read the instructions carefully. Before the experiment starts, you will have to answer some questions to verify your comprehension of the instructions.
The experiment is consists of a total of 30 rounds and is divided into two phases. Phase 1 consists of 20 rounds and Phase 2 consists of 10 rounds. Participants will be randomly assigned to the role of tax payer or to the role of tax agent. Participants assigned to the role of tax payer will be divided into groups of four participants each. The composition of these groups will be the same for all 30 rounds. The identity of the other group members will not be revealed to any participant. A single participant with the role of tax agent will be assigned to each of these groups and will remain the same for all 30 rounds. The identity of the tax agent will not be revealed to any participant; likewise, the tax agent will not know the identity of any other participant. There will, thus, be 4 distinct groups, each made up of 4 taxpayers and 1 tax agent. Groups will never interact with each other. During the experiment, participants will use experimental currency tokens, which will be converted in Euros at the end of the experiment at an exchange rate of 100 tokens = 0.40 Euros.
At the beginning of each round, taxpayers will receive 100 tokens and will decide how much to pay in taxes. The tax rate is set at 30%; on an amount of 100 tokens, taxes due are, thus, 30 tokens. Each tax payer will freely choose the number of tokens he or she wants to pay, between 0 and 30 tokens. Inside each group, taxes will be gathered in a unique account, the total amount will be multiplied by a factor of 1.5. The total amount of tokens obtained this way will be divided into equal parts among all four taxpayers belonging to the same group, independently of the contribution of each single tax payer.
Tax payer T1 pays 20 tokens in taxes, T2 10 tokens, T3 30 tokens, and T4 0 tokens. The total amount \(20+10+30+0=60\) is multiplied by 1.5; thus, \(60*1.5=90\); and divided in equal parts among each tax payer, hence 90/4=22.5. Each tax payer will receive 22.5 tokens, which will be added to those he or she still owns. In the example, T1 will receive \(80+22.5=102.5\), T2 \(90+22.5=112.5\), T3 \(70+22.5= 92.5\), and T4 \(100+22.5=122.5\).
Each tax agent is in charge of carrying out the auditing process of taxpayers inside his or her group. In case an inspection takes place, each tax payer of the group who has not paid the entire amount due will be fined. The fine is composed of the rest of the tax due multiplied by 2.
Flat: “The payment of the tax agent is fixed and independent from the proceeding of the experiment. The exact amount of the payment will be revealed only at the end of the experiment.”
Contingent: “The payment of the tax agent in each round is equal to the total taxes paid in his or her group multiplied by 1.5.
The total amount of taxes paid by the taxpayers, \(20+10+30+0=60\), is multiplied by 1.5, hence \(60*1.5=90\). The tax agent has earned 90 tokens in this round.”
During each round, participants will be asked to roll privately a die inside their cubicle on the bubble wrap layer a single time and report the outcome via the computer interface.
The outcome reported by taxpayers will have no consequence on the experiment.
The outcome reported by the tax agents, on the contrary, will determine the implementation of the fiscal inspection. The inspection will take place each time the tax agent declares via the computer interface that the outcome of his or her die roll is equal to 3. The probability of obtaining this result is 1/6 (16.67%). When the number 3 is reported and the inspections takes place, all taxpayers of the same group are audited.
If the result reported by the tax agent was equal to 3, an inspection would take place. T1 would be fined for 20 tokens, T2 for 40, T3 for 0, and T4 for 60. The fines would diminish the total earnings in that round. T1 would remain with 82.5, T2 with 72.5, T3 with 92.5, and T4 with 62.5.
At the end of each round, each tax payer will get to know his or her earnings in that round and be told whether an inspection took place. Each tax agent will get to know the taxes paid inside his or her group (Contingent: and the total amount earned in that round).
In each round taxpayers will decide how much to pay in taxes, but they will not roll the die anymore. Otherwise, the experiment will carry on as in Phase 1.
In this phase tax agents will not be in charge of carrying out the fiscal inspection by rolling the die. Tax agents will only be asked to estimate the total amount of taxes paid by taxpayers in their group in each round. The inspection will be carried out by a computerized random mechanism that assigns the probability of 1/6 (16.67%) for an inspection in each round. The tax agents will still receive information about the total of taxes paid in their group and the taking place of an inspection.
Contingent: “Their earning will be determined, as in Phase 1, by the total of tax paid multiplied by 1.5.”
Contingent: “The payment will be determined for all participants in a cumulative way, by summing up the earnings in all 30 rounds that compose the experiment.”
Flat: “The payment will be determined for taxpayers in a cumulative way, by summing up the earnings in all 30 rounds that compose the experiment.
The payment of tax agents is equal for all and independent of the proceeding of the experiment. The exact amount will be revealed at the end of the experiment.”
The final payment will occur in Euros at the end of the experiment. The exchange rate is set at 40 Cents every 100 tokens (100 tokens = 0.4 Euros).