Bribes vs. Taxes: Market Structure and Incentives

We design and implement an intervention that uses monetary feedback incentives to tax inspectors to reduce bribe payments by increasing the bargaining power of firms in their relationship with tax officials. Our intervention design is based on the outcome of a simple model that describes the interaction between firms and tax inspectors, which highlights pass-through as a key factor in this interaction. We implement two incentive treatments. In both of them, inspectors are awarded a bonus payment on top of their base salary, and the bonus amount is a piece rate that increases with the anonymous evaluation (from 0 to 10) submitted by inspected firms. Specifically, we ask surveyed firms: "On a scale from 0 to 10 where 0 is a poor job and 10 is a good job, how would you rate the job of the tax inspectors during the last inspection?" The bonus amount increases proportionally with the improvement in average evaluation among firms inspected in the local office over the baseline average. The schemes in the two treatment arms differ in the weighting of the average evaluation. In the first treatment arm (Piece Rate), the average is unweighted. In the second treatment arm (Piece Rate Tilted) we attach different weights to the evaluation submitted by firms of different size.

2016-10-01

2016-11-30

Inspection probability; elasticity of demand faced by inspected firms; price charged by inspected firms.

Inspection probabilities are constructing a dummy equal to one if the firm is subject to inspection in the reference period; elasticity of demand is derived using the answer to the questions: "suppose that the market price of such product or service increases by X%. By how much the quantity sold would drop in percentage?" with X equal to 5, 10, and 20; price is reported price of most sold item (product or service).

Evaluation of inspector's job; reported awareness of gifts/informal payment to tax inspectors; average cost; average administrative cost; profits.

Average cost and average administrative cost are derived as follows. We divide reported total revenues of the firm by the reported price of the most sold item in order to derive quantity sold. We then divide total and administrative cost by this quantity to obtain a measure of average cost and average administrative cost respectively.

We draw the baseline sample for our intervention from a list of businesses provided by the State Tax Service of the Kyrgyz Republic. Such list was obtained through sampling from the entire population of ever registered taxpayers, stratifying according to their tax category, turnover size, sector of activity, and local tax office. Given our focus on individual entrepreneurs, we built the list such that this category was overrepresented. For the experiment, we randomly assign the 50 local tax offices (356 inspectors) in the Kyrgyz Republic to either one of the two treatment groups, or to a control group. We stratify the randomization based on baseline raid inspection rates per office, and we then verify ex-post the balancedness of baseline observable firm-level characteristics. We build our follow-up sample starting from the baseline sample. We replace those businesses in the baseline sample that we could not locate with others belonging to the same local office catchment area and having either the same sector of activity or belonging to the same turnover size category. We also sample a number of additional businesses per local tax office under the sole condition that they have been inspected during the intervention period.

Randomization done in office by a computer.

Local tax office. Each local office counts on average 7 business tax inspectors, 47 surveyed firms in the baseline survey, and 60 surveyed firms in the follow-up survey.

Yes

50

2,500 firms in the baseline sample; 3,000 firms in the follow-up sample.

10 control local tax offices, 20 assigned to Piece Rate feedback incentives, 20 assigned to Piece Rate Tilted feedback incentives.