Parier sur lrsquoeacuteconomie expeacuterimentale pour reacutesoudre les

problegravemes actuels

Claude Montmarquette

Les journeacutees de lrsquoeacuteconomie

Lyon 20 novembre 2008

Qursquoest-ce que lrsquoeacuteconomie expeacuterimentale

Meacutethodologie creacutedible de recherche qui permet de recreacuteer et drsquoeacutetudier dans un environnement controcircleacute en laboratoire

Lrsquoimportance de chaque motivation particuliegravere (recherche du gain besoin de reacuteciprociteacute reacuteaction aux changements institutionnelshellip) dans la prise de deacutecision des agents

Sous conditions de risque drsquoincertitude ou drsquoeacutequivalence certaine permet de tester les hypothegraveses exactes postuleacutees dans les modegraveles et drsquoisoler lrsquoinfluence de certaines variables On peut analyser et comprendre lrsquoeacuteventuelle diffeacuterence qui existe entre les preacutedictions theacuteoriques agrave lrsquoeacutequilibre et les reacutesultats tant expeacuterimentaux qursquoobserveacutes dans la vie quotidienne

Qursquoest-ce que lrsquoeacuteconomie expeacuterimentale (suite)

Rend possible la comparaison entre les environnements les institutions et les politiques incitatives afin den eacutevaluer lrsquoefficaciteacute relative Cette approche est une plate-forme flexible permettant drsquoeacutevaluer de nouvelles politiques et de nouveaux laquo designs raquo institutionnels sans avoir agrave subir les coucircts sociaux et priveacutes associeacutes agrave leur mise en place

Permet de tester les implications de certaines politiques sociales ou de deacutecisions de gestion sans avoir agrave reacutealiser des projets coucircteux qui sont plus souvent qursquoautrement mis en place avec des paramegravetres consideacutereacutes ex post comme ayant eacuteteacute mal choisis ou speacutecifieacutes

Lrsquoeacuteconomie expeacuterimentale aide agrave la collecte de donneacutees empiriques pertinentes et fiables

Des distinctionshellip

bull Expeacuteriences sur le terrain (field experiments) participation de diffeacuterentes populations et permet de refleacuteter les choix des individus dans leur milieu et contraintes naturelles

bull Expeacuteriences naturelles formidables si possibles situation peu freacutequente et permet peu de traitements

bull Trend actuel est de combiner le labo et le terrain

Est-ce que les reacutesultats obtenus sont transfeacuterables dans la reacutealiteacute

Plusieurs reacuteponses

1 En eacuteconomie expeacuterimentale les participants sont payeacutes selon leurs deacutecisions comme dans la vraie vie Si crsquoest le cas pourquoi existerait-il des diffeacuterences

2 Plusieurs eacutetudes allant de la reacutealiteacute vers le laboratoire ou du laboratoire vers la reacutealiteacute ont prouveacute le caractegravere transfeacuterable des reacutesultats

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Qursquoest-ce que lrsquoeacuteconomie expeacuterimentale

Meacutethodologie creacutedible de recherche qui permet de recreacuteer et drsquoeacutetudier dans un environnement controcircleacute en laboratoire

Lrsquoimportance de chaque motivation particuliegravere (recherche du gain besoin de reacuteciprociteacute reacuteaction aux changements institutionnelshellip) dans la prise de deacutecision des agents

Sous conditions de risque drsquoincertitude ou drsquoeacutequivalence certaine permet de tester les hypothegraveses exactes postuleacutees dans les modegraveles et drsquoisoler lrsquoinfluence de certaines variables On peut analyser et comprendre lrsquoeacuteventuelle diffeacuterence qui existe entre les preacutedictions theacuteoriques agrave lrsquoeacutequilibre et les reacutesultats tant expeacuterimentaux qursquoobserveacutes dans la vie quotidienne

Qursquoest-ce que lrsquoeacuteconomie expeacuterimentale (suite)

Rend possible la comparaison entre les environnements les institutions et les politiques incitatives afin den eacutevaluer lrsquoefficaciteacute relative Cette approche est une plate-forme flexible permettant drsquoeacutevaluer de nouvelles politiques et de nouveaux laquo designs raquo institutionnels sans avoir agrave subir les coucircts sociaux et priveacutes associeacutes agrave leur mise en place

Permet de tester les implications de certaines politiques sociales ou de deacutecisions de gestion sans avoir agrave reacutealiser des projets coucircteux qui sont plus souvent qursquoautrement mis en place avec des paramegravetres consideacutereacutes ex post comme ayant eacuteteacute mal choisis ou speacutecifieacutes

Lrsquoeacuteconomie expeacuterimentale aide agrave la collecte de donneacutees empiriques pertinentes et fiables

Des distinctionshellip

bull Expeacuteriences sur le terrain (field experiments) participation de diffeacuterentes populations et permet de refleacuteter les choix des individus dans leur milieu et contraintes naturelles

bull Expeacuteriences naturelles formidables si possibles situation peu freacutequente et permet peu de traitements

bull Trend actuel est de combiner le labo et le terrain

Est-ce que les reacutesultats obtenus sont transfeacuterables dans la reacutealiteacute

Plusieurs reacuteponses

1 En eacuteconomie expeacuterimentale les participants sont payeacutes selon leurs deacutecisions comme dans la vraie vie Si crsquoest le cas pourquoi existerait-il des diffeacuterences

2 Plusieurs eacutetudes allant de la reacutealiteacute vers le laboratoire ou du laboratoire vers la reacutealiteacute ont prouveacute le caractegravere transfeacuterable des reacutesultats

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Qursquoest-ce que lrsquoeacuteconomie expeacuterimentale (suite)

Rend possible la comparaison entre les environnements les institutions et les politiques incitatives afin den eacutevaluer lrsquoefficaciteacute relative Cette approche est une plate-forme flexible permettant drsquoeacutevaluer de nouvelles politiques et de nouveaux laquo designs raquo institutionnels sans avoir agrave subir les coucircts sociaux et priveacutes associeacutes agrave leur mise en place

Permet de tester les implications de certaines politiques sociales ou de deacutecisions de gestion sans avoir agrave reacutealiser des projets coucircteux qui sont plus souvent qursquoautrement mis en place avec des paramegravetres consideacutereacutes ex post comme ayant eacuteteacute mal choisis ou speacutecifieacutes

Lrsquoeacuteconomie expeacuterimentale aide agrave la collecte de donneacutees empiriques pertinentes et fiables

Des distinctionshellip

bull Expeacuteriences sur le terrain (field experiments) participation de diffeacuterentes populations et permet de refleacuteter les choix des individus dans leur milieu et contraintes naturelles

bull Expeacuteriences naturelles formidables si possibles situation peu freacutequente et permet peu de traitements

bull Trend actuel est de combiner le labo et le terrain

Est-ce que les reacutesultats obtenus sont transfeacuterables dans la reacutealiteacute

Plusieurs reacuteponses

1 En eacuteconomie expeacuterimentale les participants sont payeacutes selon leurs deacutecisions comme dans la vraie vie Si crsquoest le cas pourquoi existerait-il des diffeacuterences

2 Plusieurs eacutetudes allant de la reacutealiteacute vers le laboratoire ou du laboratoire vers la reacutealiteacute ont prouveacute le caractegravere transfeacuterable des reacutesultats

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Des distinctionshellip

bull Expeacuteriences sur le terrain (field experiments) participation de diffeacuterentes populations et permet de refleacuteter les choix des individus dans leur milieu et contraintes naturelles

bull Expeacuteriences naturelles formidables si possibles situation peu freacutequente et permet peu de traitements

bull Trend actuel est de combiner le labo et le terrain

Est-ce que les reacutesultats obtenus sont transfeacuterables dans la reacutealiteacute

Plusieurs reacuteponses

1 En eacuteconomie expeacuterimentale les participants sont payeacutes selon leurs deacutecisions comme dans la vraie vie Si crsquoest le cas pourquoi existerait-il des diffeacuterences

2 Plusieurs eacutetudes allant de la reacutealiteacute vers le laboratoire ou du laboratoire vers la reacutealiteacute ont prouveacute le caractegravere transfeacuterable des reacutesultats

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Est-ce que les reacutesultats obtenus sont transfeacuterables dans la reacutealiteacute

Plusieurs reacuteponses

1 En eacuteconomie expeacuterimentale les participants sont payeacutes selon leurs deacutecisions comme dans la vraie vie Si crsquoest le cas pourquoi existerait-il des diffeacuterences

2 Plusieurs eacutetudes allant de la reacutealiteacute vers le laboratoire ou du laboratoire vers la reacutealiteacute ont prouveacute le caractegravere transfeacuterable des reacutesultats

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Aide agrave la solutions de problegravemes actuels

Notons drsquoentrer de jeu qursquoil est impensable de recommander des politiques ou des solutions relativement aux problegravemes eacutetudieacutes sans comprendre les comportements des individus et leurs preacutefeacuterences lrsquoEE a consacreacute et continue agrave le faire beaucoup drsquoefforts agrave lrsquoeacutetude des comportements individuels notamment relativement agrave leur attitude vis-agrave-vis le risque et vis-agrave-vis leur impatience agrave consommer

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

De quels problegravemes peut-il srsquoagir

bull En principe la limite des problegravemes examineacutes est lieacute agrave lrsquoimagination du chercheur agrave deacutevelopper un protocole pertinent Le deacutefi agrave cet eacutegard est de reacuteussir agrave simplifier une situation complexe tout en maintenant la pertinence de lrsquoanalyse Lrsquoexpertise des analystes et les moyens technologiques disponibles repoussent continuellement les frontiegraveres Historiquement lrsquoanalyse expeacuterimentale est passer de la validation de la theacuteorie des jeux agrave des applications de politiques lieacutees agrave la firme au marcheacute et agrave lrsquoeacutetat

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Exemples de problegravemes

bull Ressources Naturelles et politique environnementale Mise aux enchegraveres des droits drsquoeacutemission Marcheacutes concurrentiels drsquoeacutenergie eacutelectrique

bull Politique industrielle et reacuteglementaire Affection des ressources en espace Divulgation drsquoinformation Regravegles fiscales et proceacutedures de veacuterification

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Exemples de problegravemes

bull Investissement en eacuteducation et en santeacute

bull Politiques de financement de lrsquoeacutetat

bull Fraudes fiscales

bull Marcheacute du travail et participation

bull Politiques industrielles

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Will the Working Poor Invest in Human Capital A Laboratory

Experiment

by Eckel Johnson and Montmarquette

SRDC Working Paper 02-01 February 2002

A study sponsored by

Human Resources Development Canada

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Key Research Question

Given the right incentive will the working poor save to invest in human capital

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Laboratory experiment can be used as a complementary approach to generate valuable information for the design of social experiments

SRDC wanted to shed light on the behaviour and preferences of the working poor with respect to saving for learning activities before launching the learn$ave demonstration project

Objectives of the experiment

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Three research questions

bull Will the working poor invest in various assets

bull Are these subjects willing to delay consumption for substantial returns

bull How do these subjects view risky choices

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Experimental Instruments

Two instruments Information questions (43)

bull Socioeconomicbull Behaviouralbull Attitudinal

Compensated questions (64)

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Compensated Questions - 64

bull Investment PreferencesCash v Investment choices

bull Time PreferencesCash v Cash later

bull Risk PreferencesCash v Risky cash

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Sample Compensation Question From the Experiment

You must choose A or B

1048766 Choice A $100 one week from today1048766 Choice B $400 in your own training or education

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Investment Preferences

Description of Preference Questions Questions Cash

(one week from today)

Own education

Education of family

member

Retirement Durable

52 $10000 $10000

53 $50000 $50000

54 $50000 $50000

55 $10000 $20000

56 $10000 $60000

57 $10000 $60000

58 $10000 $20000

59 $10000 $60000

60 $16600 $50000

61 $25000 $50000

62 $10000 $40000

63 $25000 $50000 64 $16600 $50000

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

of participants choosing own education over $100 one week from today

229

438

546

00

100

200

300

400

500

600

$200 $400 $600

Value of own education expense

Cash vs Own Education

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

of participants choosing family memberrsquos education over $100 one week from today

Labour Force Participants

224

345

471

00

100

200

300

400

500

600

500cd$250 500cd$166 $600cd$100

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Non-labour force participants

of participants choosing education of a family member over cash one week from today

533

633

733

00

100

200

300

400

500

600

700

800

500cd$250 500cd$166 $600cd$100

Ratio of deposit value of certificate of deposit (cd) over cash

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

What Have We Learned

bull In general the working poor are risk averse and impatient

bull Nevertheless many can be induced to invest in their own education

bull 44 percent accepted offer analogous to learn$ave (3 to 1 match)

bull Overall own educational expenses was preferred to family memberrsquos education and retirement savingsbull not true for non-labour force participants

bull Some (16) couldnrsquot be induced to invest in any asset even when return approached 500

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

What Have We Learned

bull The more patient people are the more likely they are to invest in their own education

bull The more risk-averse subjects are the less likely they are to invest in their own education

bull Savings programs may benefit from higher take-up rates if they bull Offer high returnsbull Stress absolute returnsbull Allow short term savings horizons

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Fostering Adult Education A Laboratory Experiment on the efficient use of loans

grants and savings incentivesby Jonshon Montmarquette and Eckel

SRDC Working Paper 03-09 December 2003

A study sponsored by

Canada Student Loans Directorate and Applied Research Branch

Human Resources Development Canada

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Object of the experiment

To address a particular set of specific policy issues

bull How do various types of learning subsidies (grants and loans) affect the participation rates in adult education

bull Would the availability of incentives for part-time studies discourage full-time studies

bull What is the extent of windfall gain resulting from different levels and types of financial incentives

bull What are the ldquobarriersrdquo to participation in adult educationbull Lack of informationbull Lack of timebull Loan aversionbull Fear of Failurebull Preference for the presentbull Lack of readiness to learn

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

The Experiment

Focus of the full study is on four sets of measures1 Experimental preference measures

a) consumption over timeb) risky choice alternatives

2 Survey measures demographics and attitudes3 Numeracy Assessment4 Willingness to invest in post-secondary education

a) Grantsb) Loans (regular and income-sensitive repayment ndash ISR)c) Matched-savings grants

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Survey measures

bull Demographics Age gender income

bull Labor market and educational status

bull Attitudinal measures Planning debt

bull Barriers to education Skills dispositional situational

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Example of risk aversion decision

Choice A$12000 for sure

Choice B80 chance for $175 and

20 chance for $0

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Summary of Time Preference Choices

Later Payment Amount Time of Sooner Payment ($65)

Annualized Rates of Return One Month

Investment One Year

Investment 10 6527 6825 20 6608 7800 50 6771 9750

100 7042 13000

Today Tomorrow One Month

from today One year from

today 200 7583 19500

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Example of Time Preference Decision

Choice A $65 today

Choice B $130 one year from

today

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Cash vs Investment Choice

Cash alternative made the choice of investment costly to the subject

Results used to calculate elasticities of demand for education with different types of subsidy

Through their choices subject reveal their preferences for education when financed by

bull Grantsbull Loansbull ISR loansbull Matched savings

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Figure 1 Example of Education-Preference Decisions

You must choose A or B

CHOICE A

CHOICE B

$100 one week from today

FULL-TIME Education or Training (Expenses refunded)

Decision 73

$100 $300 GRANT

Decision 74

$100

$600 GRANT Decision

75

$100 $1000 GRANT

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

0

01

02

03

04

05

06

07

Full-time At least part-time

Grant

100 Matching Grant

ISR Loan

Loan

Take up Rates for $1000 in Educational Financing

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

0

01

02

03

04

05

06

Post-secondarystudent

Unemployed Part-timeemployed

Full-time employed

Labour force attachment

$2000 ISR Loan

20 Matching Grant

Proportion of urban participants that chose education financing over $100 cash

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Determinants of choosing $1000 Grant Over Cash (Ordered Probit 801 observations)

Labour Force attachment Immigrants disabled Willingness to save

(decision) Positive attitude with

respect to Education and Labor Market

Mathematical Competency PSE experience

Age Employee with education

supplement married Children (older) HS equivalency

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Labor Market Information Session

bull How does information influence Knowledge Attitudes Investment

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Labour Market Information Treatment

Initial experiment

More research

Screen

Random assignment

Follow-upexperiment

TreatmentLMI session

ComparisonNo action

No further action

No further actionNo

Yes Good general understanding of labourmarket or received educational compensation

Relatively poor understandingof labour market

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

What we hope to learn

Overall Is there evidence of Debt Aversion

Are certain types of students prone to Debt Aversion

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Determinants of choosing more education after the LMI session

Probability of choosing more education for the young participants goes up by 15 percentage points or by 33

From 42 to 57

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

What have we learned

bull Experimentally measured individual characteristics such as time preference and risk preferences can explain variability in the decision making process as much as demographic and social characteristics

bull Overall participants were sensitive to different levels of incentives and different forms of financing

bull LMI interventions can make a difference

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Willingness to Borrow Using lab experiments to examine debt aversion among Canadian high school

students

The Canada Millennium Scholarship Foundation

2008

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Research Questions

Does the willingness to borrow vary significantly among types of students

It is believed that students or potential students belonging to low SES families Aboriginal families or first generation studentsrsquo families are less likely to be willing to borrow (doubt benefits of PSE low likelihood of success)

How big a problem is debt aversion among these populations

Are there other socio-economic groups that are more likely to be less willing to borrow

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Proposed Sample

1400 12th graders and CEGEP students Manitoba Ontario and Quebec and

Saskatchewan Aboriginals RuralUrban Low and High SES

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Data Collection

Student Survey (web) Parental Survey (Web or Tel) Numeracy Assessment Experimental Measures

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Protocol

Info packets delivered to selected schools

Parental Consent Parental Survey

Students (pre-session) web survey In-school Session ($20)

Practice Decisions Experimental Decisions Numeracy Assessment Payoff

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Student Survey

Educational ambitions Expectations with

regards to ambitions Perceived obstacles to

pursuing PSE Financial means at

studentrsquos disposal Debt aversion Experience with debt Educational background

and experiences Parentrsquos education and

economic status

Inter-temporal orientation (planning ability)

Attitudes towards risk Aspiration level Engagement while in

high school Perceptions of labour

market conditions Perceptions of the cost

of and returns to PSE

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Parental Survey

Expectation and aspirations for children

Education Income Family size

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Numeracy Assessment

Measures how participants use math in every day life

Most compact way to control for differences in ability among students or schools

Marked inter-student variance that will interact with how they respond to experimental decisions

There is also a more important link - numeracy skill is the single most important determinant of both high school completion and PSE participation rates

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Experimental Measures

Time Preferences Risk Preferences Education Choices

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Time Preferences

Binary Decisions organized in increasing reward 6 rates 4 Front End Delays 2 investment or Wait times

48 Decisions

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Time Preferences

Earlier Payoff

Rate of Return

Later Payment

$75 One Month One Year

tomorrow 005 7531 7875One Week 01 7563 8250One Month 02 7625 903 Months 05 7813 11250

1 8125 150

2 8750 225

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Risk Preferences

All Graphical Representations Two Basic Measures

HoltLaury 10 binary decisions

Eckel Grossman 1 decsion chosen from SIX 5050 gambles

(Binary Version of Eckel Grossman)

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Education Choices

Basic Design

cash v Education financing

Use these decisions to distinguish pricing from form of financing

Control for Size of cash alternative Price of subsidy per $1 edu financing Absolute value of edu subsidy

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Grants $500 - $4000 Loans $1000 - $4000 Income Contingent Loans Hybrids (loans + Grants) $800 - $4000

Cash Alternatives $25 - $700

Types of Edu Financing

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Aspiration levels and Educational Choices an

Experimental Study

Lionel Page

Louis Leacutevy-Garboua

Claude Montmarquette

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

A sociological explanation for differences in educational choices bull Sociologists (Boudon 1973) also invoke

differences in aspiration levels among social classes children from upper classes have higher aspirations than children from lower classes with identical abilities

bull Aspiration levels are reference-dependent and the natural reference for children is their parentsrsquo level

bull Reaching a given level of education may be perceived as a failure in upper classes and a success in lower classes

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

x

U(x)

x

Prospect theory

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Prospect theory

bull Reference points play a central role in prospect theory (Kahneman and Tversky 1979)

bull The same outcome is framed or perceived as a GAIN if the reference is low and as a LOSS if the reference is high

bull People are risk averse in the domain of gains and tend to be risk seeking in the domain of losses

bull Moreover people are averse to losses

bull Page (2005a 2005b) has shown that the impact of aspiration levels on educational outcomes can be modeled with the notion of reference point from prospect theory

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Why an experiment

bull On real-life data it is difficult to control for many factors (eg abilities) and for the context of decision and it is often impossible to observe causal variables

bull In our experiment we observe and manipulate the reference point and we are able to measure task-specific abilities so as to control for this important factor econometrically

bull We simulate experimentally the simplest schooling system in a context-free setting and compare the ldquohuman investmentsrdquo of our experimental subjects in a GAIN treatment and in a LOSS treatment

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

The experiment is made of two treatments

In one treatment the outcomes are displayed as gains framing a low reference point

In the other treatment the outcomes are presented as losses framing a high reference point

According to prospect theory the framing of the monetary outcomes as losses should have two effects

(i) The participants should be more likely to choose to continue at stages 9 and 12

(ii) The participants should exert more effort to perform the task

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Experimental Design 15 stages grouped in 3 levels Each stage involves solving a given number of

anagrams The first level contains the stages 1 to 9 the second level the stages 10 to 12 and the third level the stages 13 to 15

At the end of each level a participant must have solved two thirds of the anagrams to be allowed to pass to the next level

The difficulty of the level increases according to the following criteria

bull The length of anagrams increases on average The structure of the experiment is represented in Figure 1 At the end of each level the participant fails or passes and correspondingly there are two possible outcomes in terms of monetary payments

bull The number of anagrams per stage increases with the level with a constant time limit of 8 minutes per stage Specifically

ndash 6 anagrams per stage for level 1

ndash 9 anagrams per stage for level 2 and

ndash 12 anagrams per stage for level 3

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Framing of the monetary payments

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Figure 2 Decision tree

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Experimental ResultsDescriptive Statistics

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Differences in choices

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Econometrics Analyses

Table 3Choices Probit regressions

Choice stage 9 Choice stage 12 Choice both stages

(1) (2) (3) (4) (5) (6)

LF 0439 (142) 0693 (177) 0649 (165) 0701 (153) 0436 (188) 0544 (202)

Male 0785 (201) 0817 (173) 0627 (232)

Not French native

-0963 (237) -0247 (035) -0480 (-153)

Play scrabble -0208 (145) 0114 (075) -0090 (-095)

Ability a -0027 (299) -0031 (188) -0028 (-411)

Risk aversion b -1092 (256) 1126 (231) -1055 (-363)

Dummy level 12 -1005 (0085)

Constant 0896 (453) 3092 (366) -0066 (023) 1334 (117) 0601 (383) 2450 (432)

Observations 109 108 44 43 153 151

Absolute value of z statistics in parenthesis Significant 10 5 1a Ability is measured with the mean time individual required to solve one anagram at the previous levelb Dummy equal to 1 if the participant chooe an uncertain lottery in a hypothetical choice

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Aspirations and Performances

bull Proposition 1 Framing (LF) matters to continue education

bull Proposition 2 In LF participants should exert more effort

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Differences in performances

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Discussion

bull Aspiration levels may play a major role in educational choices causing social inequalities in educational outcomes

bull Gender differential effect in LF not expected If Emma if from a poor family she would consider her outcome as positive if stopping at any intermediate level of education If Ben is from a high social background stopping at any intermediate level would be consider a failure

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

On Table 4

bull Males from LF represent 55 of participants reaching the highest level vs 25 from chance alone

bull Males represent 78 of the highest achievers while they represent 55 of participants

bull Could the concentration of males in higher levels of education be due to the highest rate of success of males with high aspiration levels

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Conclusion

bull We find that to frame outcomes as gains or losses in our experiment significantly changes the choices of the participants Participants in the loss framing treatment chose more often to continue further in the stages of the experiment than participants in the gain framing treatment

bull Concerning the effect of aspiration levels the prediction stemming from prospect theory are only validated for males

bull The framing of outcomes as losses which was expected to increase the motivation of the participants does so but only for males

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Individual Responsibility in the Funding of Collective Goods

Louis Levy-Garboua (TEAM University of Paris I)

Claude Montmarquette (CIRANO University of Montreal)

Marie-Claire Villeval (CNRS)

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

1 Motivation

How to increase individual responsibility in voluntary contributions to funding collective goods

Aim 1 Comparing the efficiency of taxation and rationing systems with respect to the private supply of public goods and the funding of deficits

Aim 2 Analyzing the effectiveness of individualizing the deficit handling by taxation or by rationing

A specific example Public health insurance

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

A laboratory experiment

A 2-stage experiment with a 2x2 design

Voluntary contributions to a common pool set by members of a group serve to compensate for the losses incurred by hit members

In case of a shortage of the common pool 4 possible deficit management modes taxation rationing uniform individualized

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

2 Theory

A two-stage collective goods game

Stage 1 Voluntary contribution to a common pool intended to compensate for the losses suffered by group members randomly afflicted in stage 2

Stage 2 Random selection of the victims and determination of the payoffs Treatment of the possible deficit

N =12 Number of victims S =4 Probability of a loss

Individual endowment Y = 100

Individual contribution

loss suffered by k iid

total losses in the group

10010ig

0~

ddk

LSddS

kj

1

~

N

Sp

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Uniform taxation

2

1

1 1

j=1

if L1100

2

if L100

N

N Nj

ji j jj ji N

ji

gg L g L g

N N

gg

Individual tax = 1N (deficit)

Taxation involves a deadweight loss

gi = 0 is a Nash equilibrium if

22

1

N

L

N

N

N

L

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Individualized taxation

2

11 1

1

j=1

if L100

2

if L100

NN Ni

ji j jN j

j jij

jj

i

Lg gNg L g L g

NL gg

g

N

The tax is individualized according to gi

Taxation involves a deadweight loss

Nash equilibrium gi = LN Unique if all players are assumed similar

Nash equilibrium = Optimum

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Uniform rationing

11

j=1

if L100 1

if L100

NN

jjj

ji ii

N

ji

gg

g dL

gg

In case of a deficit compensation is partial =gt payoff becomes uncertain All the victims receive the same compensation

gi = 0 is a Nash equilibrium

i

N

ijj

iiiiiii gS

S

S

g

S

LwpUgwUpEU

11001001~

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Individualized rationing

A victimrsquos compensation in stage 2 depends on his individual contribution in stage 1

2 conditions(i) A victim cannot be compensated for more than his loss(ii) The total amount of compensations is always covered by the total amount of contributions

where ci (0ltcilt1) is the rate of compensation

and with

iiii cdg 1~

100~

L

g

cS

N

jjS

kk

1

1

1

N

jji

N

jjS

kk

i

N

jj

i

gLific

gLifg

S

g

L

g

c

1

1

1

1

1

11min

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

1 100 100

N

i ij i

i i i i i i i i iS

i kk i

g gL

EU p U w g pU w g gS g g

uc

The Nash equilibrium is positive but below the optimum

10

iij

jii cLggg

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

To sum up

Optimum Equilibrium

Uniform Taxation LN 0 (provided not too large)Individualized Taxation LN LN (if )

Uniform Rationing LN 0

Individualized Rationing LN gigt0

0

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

3 Experimental designRegate software

24 sessions(12 in BUL-C3E at CIRANO Montreal and 12 at GATE Lyon)

288 participants from undergraduate classes in engineering and business schools

50 repetitions90 minutes

A test of risk aversion at the end of the session (Can$ 5 or euro2 for sure or 50 chance of winning $11 or euro5 and 50 chance of 0)

Average earnings 35 Can$ (23 euro)

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

4 Experimental results

Average Contribution per Treatment

000

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Period

Uniform Taxation Uniform Rationing Individualized Taxation Individualized Rationning

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Conclusion

With respect to the relative efficiency of the diverse deficit coverage

institutions the experimental results are compliant to the theoretical model

Uniform rationing is the worst system Uniform taxation while encouraging free-riding just as much is not much more efficient since it imposes upon the community an extra tax burden

Individualized taxation is the best deficit coverage model since - it gives individuals a sense of responsibility - it eliminates the sucker aversion

If taxation encourages cooperation (Andreoni 1993) this is true for individualized taxation but not for uniform taxation

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

The effects of perfect monitoring of matched

income on tax compliance An experimental

investigation

Cathleen Johnson

David Masclet

Claude Montmarquette

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Issues

bull Tax evasion is still an open question There is more voluntary compliance than game

theoretic models predict There are more successful audits than

principle agent models predict Empirical evidence offers contradictory

evidence on the effects of audit rates

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Motivation

bull Typically taxes are held for some time by businesses and paid to the government on a periodic basis

bull It is now possible for taxing authorities to receive sales taxes directly through financial institutions when payments are electronic

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Motivation

bull The IRS (1996) reports that income underreporting is the largest simple source of tax evasion 72 in 1988

bull Would the implementation of an automated collection scheme increase tax revenue

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Note

Must consider that individuals may react differently to an substantial increase in audit rates

Those who are relatively more risk averse will comply to maximize expected income

Less risk averse will underreport even more to maintain current level of income

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

The Basic Experiment

bull Subjects are instructed to play an unspecified number of periods

bull In each period Ss Receive income (10-110)

Report income Pay taxes on reported income Experience an audit with some probability Have complete history (private info)

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Income

bull Two sources of income each periodTotal = A + B

bull 3 types of income distribution

bull Player type and amount of income is private information

Source ASource A Source BSource B

8080 2020

5050 5050

2020 8080

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Auditing

bull Participants pay 40 tax on reported income

20 probability of Audit on income for bottom half on income distribution

10 probability of Audit on income in top half of income distribution

bull Penalty unpaid tax + 50 and automatic audit on previous two periods

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Before examining a change in monitoringhellip

ldquoldquobasicrdquo income and reportingbasicrdquo income and reporting

0 A + B (48)

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

A change in monitoring (I)

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

I A + B (21)

ldquoArdquo will be perfectly revealed (6)

As promised (21)

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

A change in monitoring II

ldquoldquobasicrdquo income basicrdquo income and reportingand reporting AnnouncementAnnouncement

The The implementation of implementation of perfect monitoring perfect monitoring of Source A of Source A incomeincome

II A + B (21)

ldquoArdquo will be perfectly revealedYou can trade 6 A for 5 B (6)

As promised (21)

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

A change in monitoring

bull 12 sessions of 12 Ss each

bull All sessions implemented the change in monitoring (two treatments)

bull 6 sessions allowed for Ss to transfer income from source A to source B (II)

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Descriptive results

bull Before announcement (basic phase) observed that audit rates did affect compliance

Higher income lower compliance rate

Overall compliance asymp 70

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Figure 1 The reporting rates through time and segments

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Observations

bull Tax revenues increased for 80 monitored

bull Tax revenues decreased for every other group -- 15 total decrease

bull Announcement period Tax revenues decrease when individuals

donrsquot see have an opportunity to transfer income

Remain the same when opportunity to shift to Souce B income (treatment II)

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Final thoughts

bull Do we think this is what will happen in real life Other changes must happen in conjunction

with this monitoring system or it may not work Transition individuals to bank accounts Reduce other costs of electronic payments Tax decrease Public goods aspect About the difficulties of reducing fiscal fraud

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix

Conclusion Geacuteneacuterale

bull LrsquoEE aide a la compreacutehension des problegravemes

bull Elle souligne des pistes de solutions

bull Elle permet drsquoinfluer sur les deacutecideurs Ces derniers ne sont jamais faciles agrave convaincre sur des bases theacuteoriques mais ils sont plus sensibles aux faits empiriques

bull Pariez sur lrsquoEE pour faire avancer les ideacutees est un bon choix