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Board structures around the world: An experimental investigation

June 4, 2007

We model and experimentally examine the board structure-performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently, but tend to destroy value by being too conservative, frequently rejecting good projects. Outsider controlled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.

Audit Information Dissemination, Taxpayer Communication, and Compliance Behavior

March 1, 2006

Taxpayer audits are a central feature of the voluntary compliance system in the United States federal individual income tax. Audits are thought to have a direct deterrent effect on the individuals actually audited. Audits are also believed to have an indirect deterrent effect on individuals not audited, and in fact there is some empirical evidence that audit rates affect compliance beyond the audited individuals themselves. However, empirical studies cannot measure or control for taxpayer awareness of audit risk, and they also cannot uncover the behavioral channels through which the direct and indirect effects operate; that is, the ways in which taxpayers learn about - and communicate among themselves - audit rates, and the subsequent effects on compliance, are not known and cannot be discovered by empirical studies. In this study, we use laboratory experiments to examine several types of information dissemination and taxpayer communication about audit frequency and audit results. These experiments allow us to test hypotheses about the effects of two types of communication of audit policies and results, in order to explore the direct and the indirect effects of audits: "official" information disseminated by the "government" (e.g., the experimenter) and "unofficial", or informal, communications among "taxpayers" (e.g., the subjects). Our results indicate that "unofficial" communications have a strong indirect effect on compliance: messages that indicate that a subject was not audited or was able to cheat actually reduce compliance, while messages that a subject was audited or paid his or her taxes increase compliance. Also, "official" announcements of information may not always encourage voluntary compliance. Working Paper 06-44

Risk Aversion and Incentive Effects

December 1, 2005

A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion. With "normal" laboratory payoffs of several dollars, most subjects are risk averse and few are risk loving. Scaling up all payoffs by factors of twenty, fifty, and ninety makes little difference when the high payoffs are hypothetical. In contrast, subjects become sharply more risk averse when the high payoffs are actually paid in cash. A hybrid "power/expo" utility function with increasing relative and decreasing absolute risk aversion nicely replicates the data patterns over this range of payoffs from several dollars to several hundred dollars.

Beauty, Gender and Stereotypes: Evidence from Laboratory Experiments

October 1, 2005

The existence of a beauty premium in the labor market and the male/female wage gap suggests that appearance can matter in the real world. We explore beauty and gender in a public goods experiment and find similar effects. We find a beauty premium, even though beautiful people contribute, on average, no more or less than others. The beauty premium, however, disappears when we provide information on individual contributions, and becomes a beauty penalty. Players seem to expect beautiful people to be more cooperative. Relative to these expectations, they appear more selfish, which in turn results in less cooperation by others. These appear to be clear examples of stereotyping. We also find a substantial benefit to being male, especially with information. This is primarily due to men being better "leaders." Men tend to make large contributions, and people follow their example and give more in later rounds.

Audit Certainty, Audit Productivity, and Taxpayer Compliance

March 1, 2005

Strategies for dealing with evasion include such standard policies as stricter enforcement (e.g., increased audit rates, more extensive audits, larger penalties). However, the exact responses of taxpayers to these enforcement measures are quite difficult to measure with existing field data, and so are not known precisely. In this paper we use experimental methods to examine how individuals respond in their compliance decisions to a "certain" probability of audit and to information concerning the "productivity" of an audit. Our design informs some individuals that their return will be audited with certainty prior to making their compliance decision, while other individuals receive information that they will not be audited; we also inform individuals of the productivity of the audit by stating how much unreported income will be discovered via the audit. We find that the announcement of audits increases the compliance rate of those who are told that they will be audited. However, the compliance rate of those who know that they will not be audited falls, and the net effect is that overall compliance falls. Working Paper 06-43

The Impact of Insurance Prices on Decision-Making Biases: An Experimental Analysis

September 1, 2003

This paper tests whether the use of endogenous risk categorization by insurers enables consumers to make better-informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether or not one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so, however fewer subjects purchase insurance when the probability of a loss is higher. Working Paper 06-15