We run a large-scale natural field experiment in which we take the role of consumers and negotiate with businesses about the terms of condition of the service. The experiment relies on job advertisements that were posted in 42 German cities. We searched for painting and flooring contractors to conduct renovation services in private households. Interested businesses randomly received one of seven treatments that specify the contract conditions. The primary outcome of interest is whether the contractors who were initially interested still want to execute the job once they have learned about our conditions.
The aim of our paper is twofold. First, we quantify the fraction of businesses that approach consumers with the intention to evade and we investigate whether the fraction of evaders varies with different market settings and signals sent by consumers. Second, we quantify the evasion rent of consumers who agree to collaborate, i.e., how much they save if they agree to evade instead of requesting an invoice.
The main experiment was implemented in a 2 x 7 design in which we varied the job advertisement and contract conditions. To understand if our results apply to other volumes of the service, we posted two additional advertisements in which we varied the number of rooms (2 x 2).
The experiment is implemented as a between-subject design.
We implement two treatments to quantify the fraction of businesses that approach consumers with the intention to evade taxes and to quantify the evasion rent. We assume that contractors propose prices with the intention to evade or to declare. In the baseline treatment, we confirm the proposed price and specify the time frame in which the job should be executed. Contractors are informed that we received several offers and will decide in the next few days. They are asked to send us an email (and propose a possible day) if they agree with our conditions. We do not specify whether we need an invoice. Since the email contains the same information as the advertisement, all initially interested contractors should accept the conditions. Reasons, why some may not reply, are, e.g., that they got other jobs in the meantime or forget to answer.
In the invoice treatment, we add the sentence ``I need an invoice, I would like to deduct the costs from taxes.'' In Germany, the government introduced in 2006 a tax subsidy for private households demanding home repair, maintenance, or remodeling services as part of an initiative against tax evasion. The subsidy gives consumers an incentive to declare the transaction to tax authorities. They can deduct 20% of the labor costs from their income tax liability if they prove the transaction through an invoice (up to the amount of 1,200 Euros (about 1,400 US Dollars), §35a Abs. 3 EStG). The existence of the tax subsidy allows us to signal that public authorities will learn about the transaction if the contractor agrees to execute the service. There are two types of contractors that will not accept the invoice treatment. First, informal businesses that are not able to issue an invoice will decline. Second, formal businesses that can issue an invoice but have proposed a price with the intention to evade will reject.
We compare the acceptance of the baseline and invoice treatment to identify the fraction of evaders. We calculate the difference in the proposed prices of businesses accepting the two conditions to identify the evasion rent.
To study if businesses are more willing to evade when consumers signal their willingness to collude, we run five treatments. Four contract conditions are implemented to study businesses' behavior when consumers ask for a price discount. Since collaborative tax evasion is assumed to be related to a lower price, asking for a price discount may signal consumers' willingness to collude. In the baseline discount treatments, we modify the text from the baseline treatment by asking for a 10% or 20% discount. We expect that a fraction of the businesses who proposed a price with the intention to declare switch to evasion when they receive a baseline discount treatment. No such reaction is possible among the contractors that receive the modified invoice treatment in which we ask for a price discount and an invoice.
We expect to observe a lower decline of acceptance rates in the baseline discount treatments than of the invoice discount treatments. This will result in a higher fraction of evaders as compared to the condition without discount.
In treatment TQ, we assess contractors' willingness to deviate from their initial declaration intention when consumers send a stronger collusion signal. The treatment text consists of two questions. We ask if the price includes an invoice and how much the price would be if we would pay cash. The word ``cash'' is commonly used as a collusion signal since cash payment ensures that a transaction cannot be tracked.