Working Paper: CEPR ID: DP13055
Authors: Francesco Amodio; Giacomo De Giorgi; Aminur Rahman
Abstract: Firms in developing countries often avoid paying taxes by making informal payments totax officials. These bribes may raise the cost of operating a business, and the price chargedto consumers. To decrease these costs, we designed a feedback incentive scheme for businesstax inspectors that rewards them according to the anonymous evaluation submitted byinspected firms. We show theoretically that feedback incentives decrease the equilibriumbribe amount, but make firms with more inelastic demand more attractive for inspectors.A tilted scheme that attaches higher weights to the evaluation of smaller firms limits thescope for targeting and decreases the bribe amount to a lesser extent. We evaluate bothschemes in a field experiment in the Kyrgyz Republic and find evidence that is consistentwith the model predictions. By decreasing bribes, our intervention reduces the averagecost for firms and the price they charge to consumers. Since fewer firms substitute bribesfor taxes, tax revenues increase. Our study highlights the role of firm heterogeneity andmarket structure in shaping the relationship between firms and tax inspectors, and providesclear evidence of pass-through of bribes to consumers.
Keywords: Business tax; Corruption; Incentives; Market structure; Demand elasticity
JEL Codes: D22; D40; H26; H71; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| feedback incentives for tax inspectors (H26) | decrease in equilibrium bribe amount (D59) |
| tilted incentive scheme (J33) | lesser decrease in bribe amounts compared to unweighted scheme (C79) |
| decrease in bribes (H57) | decrease in average costs for firms (D21) |
| decrease in average costs for firms (D21) | decrease in consumer prices (E31) |
| decrease in consumer prices (E31) | increase in tax revenues (H29) |
| feedback incentive scheme (J33) | strengthens bargaining position of firms (L14) |
| bribes passed through to consumers (H57) | impact of market structure on bribery behavior (D43) |