Bernasconi M., Bernhofer J. (2020).

Catch Me If You Can: Testing the reduction of compound lotteries axiom in a tax compliance experiment. Journal of behavioural and experimental economics, vol. 84, 101479.

Abstract:

We test the Reduction of Compound Lotteries Axiom (RCLA) in an experiment on tax compliance. We disentangle the compound probability of audit and detection and test it against a more realistic situation with a probability of audit and a subsequent probability of detection. Various experiments have shown that abstract framing often leads to violations of the RCLA; our framed set-up also reveals statistically significant departures from the RCLA. We find that subjects comply more in the two-stage lottery set-up than they do in the one-stage equivalent and that violations are compatible with subjects applying different weighting functions to one-stage lotteries versus two-stage lotteries: inverse S-shaped – likelihood insensitive – in the former set-up; and significantly less insensitive in the latter. Violations substantially decline with subjects’ experience but not at the same rate for all groups of subjects.