Intervention (Hidden)
We randomize firms into three groups:
- Control -- no lottery or payout
- Low Treat -- lottery pays out 35 ZWK
- High Treat -- lottery pays out 300 ZWK
The lottery is a game of chance in which the respondent has the opportunity to draw a card from a hat. There are 10 cards: 1 yellow, 9 black. The respondent wins if they draw the yellow card. The number of draws (with replacement) per round is a function of the total value of VAT invoices retained by the respondent. The number of draws is assigned as follows:
0 ZWK in VAT invoices, 0 draws;
1-1500 ZWK in VAT invoices, 1 draw;
1500-3000 ZWK in VAT invoices, 2 draws;
3000+ ZWK in VAT invoices, 3 draws
Treated firms are also entered in a single lottery at the end of all follow-up visits, where their probability of winning is a function of their share in all VAT invoices collected during the entire study. This is to create some incentive to continue retaining invoices beyond the threshold of 3000 ZWK.
The VAT invoices that are eligible for the study are only those for the purchase of inventory or capital improvements for the enrolled retail firm. Invoices are only valid if they reflect purchases made since our most recent visit. We aim to visit each firm every 3-4 weeks.
Firms in all three groups were given information to help them recognize valid VAT invoices.
We are especially interested in estimating heterogeneous effects by two variables from the baseline survey: (i) the share of recent purchases made from regular suppliers, and (ii) an index of the strength of relational contracts with suppliers. The index will be based on whether the firms' regular suppliers (1) provide goods on credit, (2) offer price discounts, (3) give favorable delivery terms, (4) provide extra products as a gift for regular business, and (5) provide other goods or services not formalized in a contract.
With the above heterogeneity analysis, our goal is to test whether firm-to-firm relationships constrain tax policy. Specifically, we aim to these the hypotheses that when incentivized to demand VAT invoices from their suppliers, (i) retail firms with strong supplier relationships will be less likely to switch suppliers, and (ii) retail firms with strong supplier relationships will be less likely to demand VAT invoices from their existing suppliers. The idea underlying these tests is that tax avoidance may be an implicit part of the relational contract between firms, with benefits accruing to buyers in the form of lower prices and/or the provision of other services, conditional on them not requesting formal tax invoices for their purchases.
A note about the IRB approval for this study. We received Cornell IRB approval for the pilot study in 2021, which involved a similar incentive for households to request and retain VAT invoices. I am going to list that IRB on this application, because it covered the same interventions applied in the same setting, but to a different population. After the pilot we redesigned the study to focus on small firms rather than households. We determined that the experiment with firms is not human subjects research by definition. Our in-country partners at the Zambia Revenue Authority also concluded that no IRB review was needed for this study, and authorized the study to proceed under the ZRA's standing permission to conduct research in Zambia. The director of research at ZRA provided a letter of approval and introduction for the study.
Update July 2023: for the messaging experiment, the treatment and control messages were delivered both verbally, in person, during one of our survey visits, and also provided to respondents in written form on IGC letterhead. The messages are as follows:
Control message:
We have appreciated your ongoing participation in this study, and we look forward to visiting 3-4 more times. Please continue to retain invoices and receipts. In future visits we will conduct our normal short surveys (not as long as today), and will review the receipts and invoices that you retain. Remember that VAT-registered firms must provide you with an invoice if you request one, for any purchase.
Treatment message:
We have appreciated your ongoing participation in this study, and we look forward to visiting 3-4 more times. Please continue to retain invoices and receipts. In future visits we will conduct our normal short surveys (not as long as today), and will review the receipts and invoices that you retain. Remember that VAT-registered firms must provide you with an invoice if you request one, for any purchase.
Over the last 4-5 months, X% of firms like yours involved in our study have collected more VAT invoices than your firm, and 100-X% have collected the same amount or fewer VAT invoices.
VAT firms almost always request invoices when buying and selling from each other, because they can use those invoices to claim tax refunds from ZRA. So ensuring that you get an invoice is a way to make sure that the tax you paid is sent to the government on your behalf.
Essential public services, including market infrastructure, roads, electricity, schools, and hospitals are funded by taxes. When VAT-registered firms underpay taxes, everyone loses out. Asking for a VAT invoice is a simple yet effective way to help increase tax revenue and provide better services in Zambia.