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Does the Bomb-crater Effect Really Exist? Evidence from the Laboratory

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  • Matthias Kasper
  • James Alm

Abstract

Laboratory experiments have often found that taxpayers who are audited reduce their compliance immediately after the audit, a response termed the bomb-crater effect. This study uses a laboratory experiment to investigate the bomb-crater effect, including tests of three main behavioral explanations for its existence: making up for losses incurred in the past (loss repair), assuming incorrectly that experiencing an audit decreases the risk of a future audit (misperception of risk), and assessing the probability of a future audit according to the ease of recalling a previous audit (availability heuristic). We find no evidence of a bomb-crater effect. Specifically, when comparing the changes in reporting behavior of audited taxpayers with changes of unaudited taxpayers, we find that audits do not induce a significant behavioral response in general, and they do not induce a bomb-crater effect in particular. Rather, our findings suggest that taxpayer compliance in the laboratory is quite volatile, even absent any audits, and that there is little difference in behavior between audited and unaudited taxpayers. These results have an important methodological implication for laboratory experiments: experimental studies should use control groups of unaudited taxpayers to identify the true causal effect of audits on post-audit tax compliance.

Suggested Citation

  • Matthias Kasper & James Alm, 2022. "Does the Bomb-crater Effect Really Exist? Evidence from the Laboratory," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 78(1-2), pages 87-111.
  • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2021-0014
    DOI: 10.1628/fa-2021-0014
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    Cited by:

    1. Simon Columbus & Lars P. Feld & Matthias Kasper & Matthew D. Rablen, 2023. "Behavioural Responses to Unfair Institutions: Experimental Evidence on Rule Compliance, Norm Polarisation, and Trust," CESifo Working Paper Series 10591, CESifo.
    2. Hebous, Shafik & Jia, Zhiyang & Løyland, Knut & Thoresen, Thor O. & Øvrum, Arnstein, 2023. "Do Audits Improve Future Tax Compliance in the Absence of Penalties? Evidence from Random Audits in Norway," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 305-326.
    3. James Alm & Matthias Kasper & Erich Kirchler, 2022. "Can ethics change? Enforcement and its effects on taxpayer compliance," Working Papers 2209, Tulane University, Department of Economics.
    4. James Alm & Matthias Kasper, 2023. "Using behavioural economics to understand tax compliance," Economic and Political Studies, Taylor & Francis Journals, vol. 11(3), pages 279-294, July.
    5. Lancee, Bora & Rossel, Lucia & Kasper, Matthias, 2023. "When the agency wants too much: Experimental evidence on unfair audits and tax compliance," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 406-442.
    6. Kasper, Matthias & Rablen, Matthew D., 2023. "Tax compliance after an audit: Higher or lower?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 157-171.

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    More about this item

    Keywords

    tax compliance; bomb-crater effect; laboratory experiments;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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