William D. Schulze

Why do people pay taxes

Abstract Why do people pay taxes when they have an opportunity, even an incentive, to evade? The experimental results in this paper suggest that tax compliance occurs because some individuals overweight the low probability of audit, although such overweighting is not universal. The results also indicate that compliance does not occur simply because individuals believe that evasion is wrong, since subject behavior is unchanged by the use of either neutral or loaded terms. Finally, there is evidence that individuals pay taxes because they value the public goods that their taxes finance. In short, individuals exhibit much diversity in their behavior.

The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value

Psychologists have long argued that people are much more averse to a loss than attracted to an equivalent gain. This behavior, termed loss aversion, has been formalized by Kahneman and Tversky [1979] in their reformulation of expected utility theory, prospect theory. In prospect theory the utility function is replaced by a value function that evaluates changes in income from the current level. Increases in income are weighted by a relatively small marginal utility. Decreases in income are weighted by a much larger marginal utility. In effect, the value function implies that a kink in the relationship between utility and income occurs at the initial income or reference point and that the slope of the utility function for losses in income is steeper than it is for gains. In a recent paper Knetsch and Sinden [1984] report a series of experiments that demonstrate the existence of a large disparity between willingness to accept (WTA) and willingness to pay (WTP) measures of value. They argue that the psychological theory of loss aversion explains this difference. Economic theory would suggest that individuals who exhibit a large disparity between WTA and WTP are perhaps underperceiving the value of gains or overperceiving the value of losses, are behaving in an irrational manner, and will consequently achieve a lower level of well-being than if they behaved in a true utility-maximizing manner. This would, in contrast to loss aversion, usually imply near equal values for WTA and WTP (see Willig [1976]). Further documentation of a larger than expected disparity between WTA and WTP has been obtained in surveys asking for the value of a variety of public goods. For example, Cummings, Brookshire, and Schulze [1986] document six

Provision Point Mechanisms and Field Validity Tests of Contingent Valuation

Past field validity tests of contingent valuation have relied on voluntary contribution mechanisms to elicit actual willingness to pay, and may overestimate hypothetical bias because of free riding in the actual contributions. This paper argues that provision point mechanisms are a preferred alternative for field validity tests of contingent valuation because they increase the proportion of demand revealed in cases in which public goods can be provided in a step function. The results of a contingent valuation validity study of participation in a green electricity pricing program that uses a provision point mechanism are reported, and hypothetical open-ended and dichotomous choice responses are compared to actual participation. Calibration of hypothetical responses is also explored.

A Test of the Expected Utility Model : Evidence from Earthquake Risks

The purposes of this paper are twofold. The first is to demonstrate that the expected utility hypothesis is a reasonable description of behavior for consumers who face a low-probability, high-loss natural hazard event, given that they have adequate information. The second is to demonstrate that in California information on earthquake hazards was generated by a 1974 state law that created a market for safe housing that previously did not exist.

Valuing Environmental Commodities: Some Recent Experiments

I compare the price elasticity of economic and political preferences. My central hypothesis is that willingness to pay, whether expressed verbally or through cash transactions, is more price-elastic for economic consumption goods than for public goods. I ...

The valuation of aesthetic preferences

Abstract This paper reports on a bidding game applied to estimate aesthetic damages from possible construction of the Kaiparowits power plant near Lake Powell. Three problems associated with the interpretation of bidding games are explored theoretically and empirically: (1) incentives for biased responses, (2) divergences between compensating and equivalent variation and (3) problems of interpersonal comparison in the aggregation of individual bids.

Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events

Two insurance experiments using real-money consequences and multiple rounds to provide experience are described. In the first experiment, subjects bid for insurance to prevent a fixed loss of

Voluntary revelation of the demand for public goods using a provision point mechanism

4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of.01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to

The private provision of public goods: tests of a provision point mechanism for funding green power programs

40. A similar bimodal distribution was obtained that persisted over 50 rounds of experience. These laboratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to worry too much about them.

Can Hypothetical Questions Reveal True Values? A Laboratory Comparison of Dichotomous Choice and Open-Ended Contingent Values with Auction Values

A one-shot provision point mechanism with money-back guarantee and proportional rebate of excess contributions is tested in an induced value framework and in experimental environments chosen to mimic field conditions. The results show that this relatively simple mechanism is empirically demand revealing in the aggregate when used with large groups of students who have heterogenous valuations for the public good. Approximately demand revealing behavior was obtained under three alternative information conditions. These results are an important step in the design of a mechanism simple enough to allow field applications, but capable of efficiently providing public goods through voluntary contributions.