Reducing the Shadow Economy with Nudges: A Randomized Control Trial in Latvia

Last registered on September 09, 2021

Pre-Trial

Trial Information

General Information

Title
Reducing the Shadow Economy with Nudges: A Randomized Control Trial in Latvia
RCT ID
AEARCTR-0008198
Initial registration date
September 07, 2021
Last updated
September 09, 2021, 7:15 PM EDT

Locations

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Primary Investigator

Affiliation
The Baltic International Centre for Economic Policy Studies

Other Primary Investigator(s)

Additional Trial Information

Status
In development
Start date
2021-05-01
End date
2022-03-01
Secondary IDs
Prior work
This trial does not extend or rely on any prior RCTs.
Abstract
The goal of the study is to investigate the behaviour of corporate firms in Latvia and examine various approaches to increase the tax compliance. The interventions of the study examines two competing theoretical explanations what motivates to pay taxes. One is the so-called deterrence approach, stemming from the standard model of tax evasion. It predicts that tax compliance is based on tax rate, audit probability, penalty rate and income. Alternatively, non-deterrence approach states that tax compliance is based on broader propositions, such as morality, social norms and willingness to contribute to the public good. The field experiment examines both approaches on tax compliance behavior in Latvia. The study consists of seven different messages randomly assigned and sent to firms for whom the average salary in the first half of 2021 has been lower than 70% in comparison to the region and sector in which the firm is operating.
External Link(s)

Registration Citation

Citation
Saulitis, Andris. 2021. "Reducing the Shadow Economy with Nudges: A Randomized Control Trial in Latvia." AEA RCT Registry. September 09. https://doi.org/10.1257/rct.8198-1.0
Sponsors & Partners

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Experimental Details

Interventions

Intervention(s)
The control message asks to minimize the risks of engaging in the shadow economy by considering to raise the salaries. Three treatment messages additionally include various audit probabilities, while the remaining three treatment messages include various non-deterrent messages.
Intervention Start Date
2021-09-07
Intervention End Date
2021-09-23

Primary Outcomes

Primary Outcomes (end points)
Average salary for the employees reported to the State Revenue Service during the period October-December 2021.
Primary Outcomes (explanation)
In order to compare the deterrence to non-deterrence approach, I will merge the first three treatment groups (where the text messages state various audit probabilities) and the last three treatments (where the text messages include various non-deterrence messages) and compare them to the control group and no message condition.

Secondary Outcomes

Secondary Outcomes (end points)
(i) the firm's average salary ratio to the average salary in the region and sector the firm operates; (ii) number of employees declared; (iii) number of incoming requests from the firms receiving the text messages; (iv) number of closed down businesses.
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
The experimental design consist of seven different text messages communicated to the firms with average salary in the first half of 2021 below the 70% average in the region and sector the firm is operating. The messages are advising to mitigate the differences in the next months. The treatment messages are examining the best approach to communicate with the firms. They are created based on previous studies on tax compliance and compares deterrence and non-deterrence approaches.
Experimental Design Details
Not available
Randomization Method
Randomization was carried out in office by a computer. The firms were blocked by the statistical region and balanced on key control variables, namely: (i) average salary ratio to the region and sector average salary for the first half of 2021 and July 2021; (ii) the total amount of paid taxes in 2021; (iii) business operating sector; (iv) total turnout in 2021 (converted to log); (v) average number of employees in 2021; (vi) age of the firm; (vii) whether the firm has received COVID-19 crisis related grants from the state.
Randomization Unit
Firm
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
3,929 firms
Sample size: planned number of observations
3,929 firms
Sample size (or number of clusters) by treatment arms
491 firms no message, 489 control, 490 Treatment group 1, 491 Treatment group 2, 494 Treatment group 3, 490 Treatment group 4, 491 Treatment group 5, 493 Treatment group 6. The actual number of firms in each experimental condition can be different if the firm has been audited during the period July-September 2021, i.e., before the beginning of the intervention. In that case, the firm is dropped from the sample.
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
IRB Approval Date
IRB Approval Number
Analysis Plan

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