Working Paper: NBER ID: w26180
Authors: William Morrison; Dmitry Taubinsky
Abstract: This paper tests costly attention models of consumers’ misreaction to opaque taxes. We report an online shopping experiment that involves shrouded sales taxes that are exogenously varied within consumer over time. Some consumers systematically underreact to sales taxes while others systematically overreact, but higher stakes decrease both under- and overreaction. This is consistent with consumers using heterogeneous rules of thumb to compute the opaque tax when the stakes are low, but using costly mental effort at higher stakes. The results allow us to differentiate between various theories of limited attention. We also develop novel econometric techniques for quantifying individual differences.
Keywords: Costly Attention; Opaque Taxes; Consumer Behavior; Sales Tax; Heuristic Shortcuts
JEL Codes: D9; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Opaque sales taxes (H29) | Systematic underreaction (G41) |
| Stakes involved (Z23) | Consumer behavior (D19) |
| Higher stakes (C73) | Decrease in underreaction (G41) |
| Higher stakes (C73) | Increase in valuation weights (G32) |
| Higher stakes (C73) | Decrease in overreaction (D91) |
| Individual differences in valuation weights (D11) | Overreaction to standard taxes (H29) |