Using Divide-and-Conquer to Improve Tax Collection by Lucia Del Carpio

Join us for this week's event in the Experimental Economics Seminar Series, Autumn Term 2023

Join Lucia Del Carpio, from INSEAD, as they present their research on Using Divide-and-Conquer to Improve Tax Collection.

Abstract

Tax collection by capacity constrained governments may exhibit multiple equilibria: if delinquency is low, limited enforcement capacity is enough to discipline deviators; if delinquency is high, limited enforcement capacity is overstretched and no longer dissuasive. In principle, divide-and-conquer, a theoretically important but untested principle from mechanism design, can be used to unravel the undesirable high-delinquency equilibrium. We investigate the challenge of doing so in practice. Our preferred mechanism takes the form of Prioritized Iterative Enforcement (PIE). Taxpayers are assigned a rank trading-off expected collection and expected capacity use. Taxpayers are then iteratively threatened in small groups for which collection capacity is sufficient to induce compliance. After repayment occurs, unused collection capacity is released to issue the next round of threats. In partnership with a district of Lima (Peru) we experimentally evaluate the impact of PIE on the collection of property taxes from 13432 taxpayers. Reduced-form evidence both validates and refines the theoretical benchmark. A structural model of tax-payer behavior suggests that, keeping the number of collection actions fixed, PIE would increase tax revenue by 11.3%.

This seminar will be held in the Economics Common Room on Wednesday 6th December 2023 at 11.00am. This event is open to all levels of study and is also open to the public. To register your place, please contact the seminar organisers.

This event is part of the Experimental Economics Research Seminar Series.