Deterrence Effects of Auditing Rules: An Experimental Study

Tan, Fangfang and Yim, Andrew (2010): Deterrence Effects of Auditing Rules: An Experimental Study.

Abstract

This paper examines the deterrence effect of two auditing rules via a laboratory experiment. A traditional rule which is usually assumed in the auditing literature, audits a taxpayer with a constant probability, which is independent of others' tax returns. A bounded rule recently proposed and analyzed in the literature chooses a sample from the population of reported low-income taxpayers to audit, taking into account the capacity of the auditor. We �find that the deterrence effect of a bounded rule is as strong as that of a traditional rule, but is more cost-effective since fewer audits are conducted. The results lend further support to the bounded rule as a more cost-effective alternative to the traditional rule.

• Item Type: MPRA Paper
• Language: English
• Keywords: Audit sampling plan, tax audit, tax compliance, tax evasion, experimental economics.
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

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