Salience and taxation: salience effect versus information effect

Abstract

Posting tax-inclusive price tags on grocery products can reduce demand through an information effect that corrects consumers who misperceive the actual tax status. We disentangle the information effect from the salience effect developed by Chetty, Looney and Kroft (2009, CLK for short). By utilizing CLK's survey finding that 20% of shoppers mistakenly think there is no sales tax on toothpaste, we show that the information effect actually explains 31% of the sales drop in CLK's field study. Therefore, ignoring the information effect may overestimate the salience effect by a large degree.

Keywords:

• demand
• information effect
• sales tax
• salience effect
• taxation

JEL Classification:

• H71
• H25
• D12

Notes

¹ An implicit assumption in Equation 2(2) of our study and Equation 1(1) in CLK's study is that consumers have good knowledge of the actual sales tax rate. The CLK survey provides evidence for this assumption.

² CLK indicate that consumers ‘generally believe that food is not taxed, but inedible items and “sin” goods are taxed’. Exceptions to this heuristics led to most of the errors in their survey.