Conference on Behavioral Economics and Experiments
AFSE-JEE
Lyon, 23-25 May 2007
The Physionomics of Tax Evasion:
Cheating Rationally or Deciding Emotionally?
Giorgio Coricelli (ISC, CNRS, Lyon)
Matteus Joffily (ISC, CNRS, Lyon)
Claude Montmarquette (CIRANO, U. of Montreal)
Marie-Claire Villeval (GATE, CNRS, U. of Lyon, and IZA, Bonn)
Motivation
Standard view of tax evasion: cheating on taxes is a game
Allingham and Sandmo 72, Yitzhaki 74)
Ignores the impact of social interactions on behavior:
Multiple equilibria (Schelling 78; Akerlof 80)
Social multiplier effect (Glaeser, Scheinkman, Sacerdote 03)
Impact of social interations on tax evasion:
Social conformity effect (Gordon 89, Myles and Naylor 96, Fortin, Lacroix and
Villeval 07)
Social learning effect
Fairness effect (Spicer and Becker 80)
Satisfaction effect (Cowell 90, Pommerehne et al. 94)
Literature largely ignores the role of emotions
Why are emotions important in this context?
If there is a psychic cost in evading taxes, not accounting for it will reduce
the predictive power of the model
Assumption: the psychic cost can be related to 2 types of emotions:
- Internally-oriented emotions (guilt, anxiety) if the individual has not
reported all his income and has been audited and punished
- Externally-oriented emotions (shame) if the cheating behavior is made
public to the group
Problems:
- Emotions are usually either ignored or mentionned as an indirect
explanation of behavior in the interpretation of data
- When do emotions arise? When people report their income? When they
are audited?
This paper: An experimental measure of internally and externally-oriented
emotions in tax evasion
A standard tax evasion game with risk
in which we allow for social interactions
including a physiological measure of emotions (Skin Conductance Measures)
Originality:
- A study of the role of emotions in tax evasion
- Distinct physiological measures of emotions
when people report their income
when they receive a feedback on audit
- Physiological measures of emotions in the context of social interactions
- Manipulation of the dissemination of information (a ceteris paribus change) to
differenciate internally-oriented and externally-oriented emotions
Experimental design
• The game
N=8
4 individual income levels: 50, 100, 150 and 200
Distribution of income is not made common knowledge
Random allocation of income levels
A unique tax rate: 55%
2 individual audit probabilities:
– If the reported income is among the 4 highest reported income:
35%
– If the reported income is among the 4 lowest reported income:
65%
One decision: how much income to report?
• Payoffs
- No audit:
пi = (income – tax on reported income)
- Audit and no evasion:
пi = (income – tax)
- Audit and evasion:
пi = (income – tax - fine)
with tax rate applied to the actual income
and fine = tax rate * evaded income
• Information
– Common knowledge: tax rate, individual income, audit
probabilities
– No information about the distribution of income in the group, the
actual probability of audit, the number of cheaters
• Equilibrium prediction
No income to be reported under risk neutrality
• 2 treatments
– Benchmark treatment
the agent receives an income
s/he reports her/his income
s/he is audited or not
s/he receives her/his payoff
– Picture treatment
The agent knows that her/his picture will be disseminated in the
room if an audit shows that s/he has not reported her/his full
income
Only one picture disseminated on each screen
An audited cheater can only see his/her own picture
• A within-subject comparison
30 periods
Alternation of sets of 5 periods with either the Benchmark or the
Picture treatment
Physiological measure of Electrodermal Activity (EDA)
• EDA is primarily related to the activity of the eccrine sweat glands located on the palmar
and plantar surface. Those glands are predominately controlled by the sympathetic division
of the autonomic nervous system (ANS). (Dawson et al, 2000)
• EDA activity can be decomposed into a tonic component, EDA level, and a phasic
component, EDA response.
Modified from Ebling et al, 1992
Modified from Dawnson and Nuechterlein, 1984
Skin Conductance Response (SCR)
• EDA responses measured with a constant voltage (0.5V) applied between two
electrodes (Ag-AgCl) placed on the palmar surface are called Skin Conductance
Response (SCR).
• Psychophysiological studies have shown a high correlation between SCR and
emotional arousal elicited by external stimuli. (Bradley et al, 2001)
Biopac Systems, USA
SCR Quantification
• SCR can be described by several parameters: amplitude (0.2-1.0µS), latency (1-
3s), rise time (1-3s) and half recovery time (2-10s). The most frequently reported
parameter in psychophysiological studies is the amplitude.
• When a stimulus is repeated several times and an average amplitude of the SCR is
to be calculated (Dawson et al, 2000):
 SCR Amplitude refers to the mean value computed across only those trials in
which a measurable (nonzero) response occurred;
 SCR Magnitude refers to the mean value computed across all stimulus
presentation including those without a measurable response.
Dawson et al, 2000
Experiment: EDA Recording & Processing
• Signal Recording:
 BIOPAC MP150W + TEL100C
 Constant voltage excitation at 0.5VDC
 Ag-AgCl electrodes
 Conductible gel (Biopac GEL101)
 Analogical low-pass filtering at 35Hz
 Sampling rate at 100 Hz
Biopac Systems, USA
• Data Reduction:
 EDA signal is off-line low-pass filtered at 0.5Hz
 Detected SCR amplitudes are threshold at 0.02µSiemens
 Stimulus-specific SCRs have onset 0.7-3.7s after stimulus onset
INV
DEC2.D - salomon
1.D - iroise
2.C - barentsz
1.C - rouge2.B - noire
1.B - caspienne
2.A - sargasse
1.A - marmara
4.90
9.93
7.73
9.51
6.79
2.00
-2.00
2.00
-2.00
0.82
-0.82
2.00
0.00
-2.00
0.82
-0.82
0.00
10.88
21.76
minutes
32.64
umhos
6.30
umhos
umhos
6.01
umhos
umhos
8.98
7.73
Volts
10.48
Volts
umhos umhos
4.59
Volts
AUD
umhos
11.58
7.54
6.47
Volts
PIC
13.34
Volts
PAY
Simultaneous EDA recording from 8 subjects
Control questions
- Self-reported emotions:
Self-report of the « intensity of sentiments »
and the « nature of sentiments » (positive -> negative)
on a 7-level Likert scale
at the end of each of the 30 periods
- A kind of PANAS test (Positive and Negative Affect Schedule) with selfreported sentiments regarding two scenarii (audit of a subject who
evaded tax, w/ and w/o picture dissemination)
happiness, guilt, regret, joy, shame, sadness, stress, annoyance
7-level Likert scale
at the end of the session
- Attitudinal post-experimental questionnaire
Attitude towards fraud in public transportation, tax evasion by shopkeepers, non-respect of the traffic rules
7-level Likert scale
A parsimonious test of attitudes towards risk
From Gneezy and Charness, 2006
Endowment of 15 points (= show-up fee of €3)
How much of this endowment to invest in a risky asset?
P(success)= 0.5
Payoff function:
-If the investment is a success:
 i  15  I i  2.5I i
-If the investment is a failure:
 i  15  I i
Choice of the amount invested at the beginning of the session and
random draw at the end of the session
Procedures
• 6 sessions
Conducted at GATE, Lyon (France)
48 undergraduate Ss from the local engineering and business
schools
Computerized experiment with REGATE (Zeiliger, 00)
Average duration: 90 minutes
• Payoffs
Payment of the average payoffs in two randomly drawn periods
at the end of the session
100 points = 15 €, paid in cash in a separate room by a person
not aware of the content of the experiment
3 € as a show-up fee
Average earnings: 19.33 €
Preliminary results
Proportion of reported income
Proportion of reported income
75
70
65
60
Benchmark T
Picture T
55
50
45
40
50
100
150
200
Income levels
The proportion of reported income is higher:
- for the low incomes
- in the Picture treatment for each income level
Amplitude of SCR and income
Audit
0,25
0,25
0,2
0,2
SCR-amplitude
SCR-amplitude
Decision
0,15
0,1
0,05
0,15
0,1
0,05
0
50
100
150
200
0
50
Income in points
100
150
200
Income
Amplitude of SCR increases in income level
Likely due to the fact that higher income Ss report a lower proportion of
their income
Amplitude of SCR by evasion behavior and by treatment
0,2
0,18
0,16
0,14
0,12
No evasion
0,1
Evasion
0,08
0,06
0,04
0,02
0
Decision - Benchmark
Decision - Picture
Audit - Benchmark
Audit - Picture
Tax evasion raises emotions
The difference in emotional intensity between evaders and non-evaders
is maximum at the time of audit and in the picture treatment
A 2-step estimation procedure to control for endogeneity
First step: Determinants of the reported income (in proportion of income)
Random-effects tobit model
Ss with high income in points report less
Ss report more in the Picture treatment
Males, less wealthy Ss, less risk averse Ss, and students in business report less
Ss who have a poor opinion of traffic offenders and fare dodgers report more
Second step: Determinants of the SCR amplitude
Random-effects Tobit model with predicted % of reported income
Guilt
Shame
Emotions arise with a lower reported proportion of income, picture dissemination,
risk aversion
Hesitant Ss feel more emotions
An audit in the previous period increases decision SCR, and a punishment in the
current period increases audit SCR
Conclusion
Srong results
Tax evasion raises emotions
Existence of a shame situation reduces cheating
Emotions matter:
punishment increases SCR due to internally-oriented
emotions (guilt, regret);
picture dissemination increases SCR due to externallyoriented emotions (shame)
Risk averse Ss report more but, controlling for tax evasion, do not feel
more emotions
Implications
Emotions influence economic behavior
Creating a situation of guilt and shame generates emotions
Possible extensions:
Other estimations / other SCR indicators
Reinforcement of the shame / guilt environment