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Free keywords:
redistribution, subsistence income, implicit costs of taxa-
tion, transparency, monitoring
Abstract:
Although taxation distorts work incentives both for taxpayers and transfer recipients, its net effect on labor provision is shown to be less severe than predicted by the theory. It is likely that the reciprocity between taxpayers and transfer recipients plays an important role in
mitigating the negative consequences of redistribution and maintaining a high level of effort. To check it we run a series of real-effort experiments exploring the production effects of taxation in the environment with unilateral monitoring: Taxpayers can continuously monitor the effort of the transfer recipient, which is designed to trigger reciprocity.
Surprisingly, we find that monitoring decreases the total labor provision: recipients produce significantly less under monitoring, while the
production of the taxpayers remains unchanged.
