The efficiency impact of uncertain taxes: an experimental study

ABSTRACT

Uncertainty is generally assumed to have negative economic effects, but they are difficult to quantify due to measurement and definitional issues in the real world. We use a carefully controlled laboratory experiment to examine policy uncertainty and its impact on economic efficiency. We employ a double-auction design and compare the efficiency of a market with a known tax to that of a risky tax (of known probability) and an uncertain tax (of unknown probability). We find that the uncertain tax generates more deadweight loss than a risky tax of equal expected value.

KEYWORDS:

• Tax
• uncertainty
• efficiency
• experiment

JEL CLASSIFICATION:

• H20
• C92

Acknowledgments

The authors would like to thank Reagan Sobel for her help running the experiments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

The data that support the findings of this study are available from the corresponding author, CB, upon reasonable request.

Notes

¹ For a more detailed discussion see LeRoy and Singell (1987).

² All value numbers are in experimental currency, converted into US$ at the end of the experiment at the rate of $0.025/experimental currency unit.

³ Both buyers and sellers values are reset each round, regardless of how many units were bought or sold in the previous round.

⁴ These parameters are the same as those used in Cox, Rider, and Sen (2018).