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Abstract
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Before
This project is on the topic of tax leakage and policy interventions to increase VAT compliance in Zambia. We will test the impact of a probabilistic incentive (similar to a lottery ticket) on the extent to which small retailers in Lusaka request VAT invoices when making purchases from their suppliers. We will examine heterogeneous impacts by some key firm characteristics measured at baseline.
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After
This project is on the topic of tax leakage and policy interventions to increase VAT compliance in Zambia. We will test the impact of a probabilistic incentive (similar to a lottery ticket) on the extent to which small retailers in Lusaka request VAT invoices when making purchases from their suppliers. We will examine heterogeneous impacts by some key firm characteristics measured at baseline.
In a second experiment launched concurrently with the end of the first, we will test whether a tax morale message has an impact on the value of VAT invoices retained by firms after the removal of financial incentives. This is a study of habit formation and the possibility of transitioning from extrinsic to intrinsic motivation to assist with tax compliance.
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Last Published
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Before
March 10, 2023 02:56 PM
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After
August 03, 2023 10:56 AM
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Intervention (Public)
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Before
All study firms are asked to request and retain receipts and invoices when making purchases from their suppliers. At each follow-up visit, treated firms are provided with the opportunity to play a lottery-style game to win a cash prize. The probability of winning cash is increasing in the total value of VAT invoices retained.
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After
All study firms are asked to request and retain receipts and invoices when making purchases from their suppliers. At each follow-up visit, treated firms are provided with the opportunity to play a lottery-style game to win a cash prize. The probability of winning cash is increasing in the total value of VAT invoices retained.
We launched a second intervention in July-August 2023, as the lottery experiment wrapped up. We asked all firms to continue retaining receipts and invoices for the coming months, but removed all financial incentives. We now randomized firms into two new groups, treatment and control, for a new experiment we call the messaging experiment. The treatment group received a message intended to prime tax morale and intrinsic motivation to support tax compliance, the control group received a placebo message.
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Intervention End Date
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Before
July 31, 2023
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After
November 30, 2023
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Primary Outcomes (End Points)
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Before
1. Total value of VAT invoices received when making purchases from suppliers or capital improvements to the business
2. Share of stocking or capital improvement transactions that lead to the receipt of a valid VAT invoice (as a share of all stocking/capital improvement purchases)
3. VAT-related shopping behaviors, including switching to a VAT-registered supplier, reallocating business to an existing VAT-registered supplier, and inquiring after the VAT registration status of an existing or potential supplier
4. The share of stocking/capital purchases from regular suppliers, where regular suppliers are those from whom the firm has made at least two recent purchases, and from which it plans to purchase again
5. The strength of relational contracts with suppliers
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After
1. Total value of VAT invoices received when making purchases from suppliers or capital improvements to the business
2. Share of stocking or capital improvement transactions that lead to the receipt of a valid VAT invoice (as a share of all stocking/capital improvement purchases)
3. VAT-related shopping behaviors, including switching to a VAT-registered supplier, reallocating business to an existing VAT-registered supplier, and inquiring after the VAT registration status of an existing or potential supplier
4. The share of stocking/capital purchases from regular suppliers, where regular suppliers are those from whom the firm has made at least two recent purchases, and from which it plans to purchase again
5. The strength of relational contracts with suppliers
Update, July 2023: The primary outcomes for the messaging experiment are 1 and 2 above; the secondary outcomes for the messaging experiment are 3,4, and 5.
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Primary Outcomes (Explanation)
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Before
We measure the strength of relational contracts with suppliers using an index 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. We also investigate these outcomes separately.
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After
We measure the strength of relational contracts with suppliers using an index 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. We also investigate these outcomes separately.
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Experimental Design (Public)
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Before
We randomize 1083 small retail firms in Lusaka, which we enrolled in a baseline survey, into three treatment arms:
Control (407 firms)
Low treatment (338 firms)
High treatment (338 firms)
Treated firms receive either a low or a high financial incentive to request and retain VAT invoices from their suppliers. Treatment assignment is at the individual firm level, stratified on key characteristics that we identified at baseline.
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After
We randomize 1083 small retail firms in Lusaka, which we enrolled in a baseline survey, into three treatment arms:
Control (407 firms)
Low treatment (338 firms)
High treatment (338 firms)
Treated firms receive either a low or a high financial incentive to request and retain VAT invoices from their suppliers. Treatment assignment is at the individual firm level, stratified on key characteristics that we identified at baseline.
Updatee July 2023:
At the conclusion of the above experiment, we launched a second RCT involving a tax morale message. 816 firms were still participating as of July 2023. We randomly assigned 50% to messaging treatment and 50% to messaging control (408 each), at the firm level.
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Planned Number of Observations
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Before
1083 firms, for a minimum of 4 follow-up surveys (after the baseline survey, and a brief survey conducted during intervention delivery).
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After
1083 firms, for a minimum of 4 follow-up surveys (after the baseline survey, and a brief survey conducted during intervention delivery).
Update July 2023: 816 firms, for 3-4 follow-up surveys in the messaging experiment.
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Intervention (Hidden)
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Before
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.
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After
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.
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