Using Divide and Conquer to Improve Tax Collection: Theory and Laboratory Evidence
We consider a government collecting taxes from a large number of tax-payers using limited enforcement capacity. Under random enforcement, limited capacity results in multiple equilibria: if most agents comply, limited enforcement is sufficient to dissuade individual misbehavior; if most agents do not comply, enforcement capacity is over-stretched and fails to dissuade misbehavior. In settings without behavioral frictions, prioritized enforcement strategies can implement high collection as the unique rationalizable outcome. We investigate both theoretically and experimentally the extent to which this insight extends to environments with incomplete information and bounded rationality.
This working paper has been combined into (and is now superseded by) the authors’ later work "Using Divide-and-Conquer to Improve Tax Collection" NBER working paper, no. 30218. Please use that working paper for citation.