Long-term Contracts And Tax Evasion: Experimental Evidence - pilot study - Daniela Dicagno (Luiss) Tibor M Neugebauer (Universität Hannover) Luca Panaccione (Luiss) Prepared for ESA world meeting, 2007 Rome

Agenda 1.Introduction 2.Experimental design 3.Results of pilot experiment 4.Discussion

1 Introduction Evidence: –Illegal workers in Italy and elsewhere –New law for legal contracts : short-term contracting is possible. Research question: –Do we have less illegal workers, if the contract is short-term?

1 Introduction The problem of tax evasion can be modeled as choice under uncertainty (see Allingham and Sandmo, 1972, Journal of Public Economics). Experimental research: Schram and Gerxhani (2001), Alm and McKee (2004), Torgler (2003), Mittone (2006). –Stress the social and moral aspect of tax evasion or the individual process of decision under uncertainty. The problem of labor tax evasion is more complex, since it involves a dynamic aspect of choice. Since the entrepreneur hiring legal jobs commits himself in the long period, whereas choosing illegal work, hence labor tax evasion, leaves more flexibility at the cost of the risk of being audited.

2 Experimental design Individual decision task (within subjects variation : 2  50 rounds) –Decision to employ one or two workers in a period –Worker can be employed legally or illegally Game against auditing authority (illegal workers) –Auditing probability 50% (lucky / unlucky) –Long term legal contract duration 5 periods (commitment) –Short term legal contract duration 1 period Game against nature (long-term workers) –Bad state –Good state –Transition probability of a change of state 1:3 Procedure –Z-Tree (Fischbacher 2007) –Cumulative payoff over rounds

a : illegal worker b : legal worker Probability of change ¼

3 Results of the pilot study Participants and treatment order 11 observations (Luiss - advanced students) Long-short treatment order –Long-term contract treatment (50 rounds) was followed by short-term contract treatment (50 rounds) We don‘t observe the expected treatment effect –Long-term contracts induce a number of 1,69 workers per period, significantly (p =.053, two-tailed) more than the number of workers employed on the short-term contract, which is 1,58 –Long-term contracts induce a share of 62% of legal workers. This share is not significantly different from the 57% share of legal workers in the short-term treatment

4 Discussion Is the experimental evidence due to an order effect? Is the sample size too small? Shall we use a different design?