[Vid-stund] Málstofa í Hagfræðideild: The Effect of Tax Inclusive and Exclusive Prices on Demand.

[Bjargey Anna Guðbrandsdóttir]

Málstofa á vegum Hagfræðideildar
The Effect of Tax Inclusive and Exclusive Prices on Demand
Oddi, 3. hæð, föstudaginn 16.des. kl. 11:00-12:00

A growing economics literature challenges the view that economic actors 
duly weight all of the relevant features of a decision problem in making 
choices. Recent work shows that some components of a price are less 
prominent than others. 

In a controlled laboratory experiment, differences were found in the 
consumption patterns between subjects that face full tax inclusive prices 
versus those who face the tax exclusive prices (and with the taxes added 
on at the checkout). 

Naomi Feldman er hagfræðingur í rannsókna- og tölfræðideild seðlabankans í 
Washington. Hún lauk doktorsprófi frá University of Michican 2004. 
Megináhugamál eru fjármál hins opinbera, einkum viðbrögð við skattastefnu. 
Hún hefur rannsakað skattasniðgöngu og framlög til mannúðarmála.

Abstract
A growing economics literature challenges the view that economic actors 
duly weight all of the relevant features of a decision problem in making 
choices. Recent work shows that some components of a price are less 
prominent than others. 

For example, Morgan and Hossain (2006) conduct a series of auctions on 
eBay and find that bidders largely disregard the shipping and handling 
charges. As a result, low opening auction prices and high shipping costs 
lead to higher final prices than when the reverse holds. More closely 
related to our paper, Chetty et al. (2009) conduct a field experiment at a 
California grocery store at which they post tax-inclusive prices for 750 
products subject to sales tax for a three-week period. They find that 
demand for the treated products was about 7% lower relative to similar 
control products at the same store and identical untreated products at 
nearby control stores. 

In this paper, we test the equivalence of tax-inclusive and tax-exclusive 
prices in a controlled laboratory experiment. We present each subject with 
a series of attractive goods highly discounted in price and an endowment 
to spend on these products or to keep as each sees fit. Each subject 
repeats this task over 10 rounds with the selection of products and their 
prices varying across rounds. In a between-subject design, subjects are 
informed that all prices include the 16% sales tax (tax-inclusive 
treatment) or that the sales tax will be added to all prices at the 
checkout (tax-exclusive treatment). Our experimental design thus provides 
us with individual-level purchasing decisions under varied conditions that 
are systematically controlled by the experimenters. Furthermore, our 
design minimizes Hawthorne effects associated with Chetty et al.'s field 
experiment. In contrast to Morgan and Hossain, our individual-choice 
experiments involve no price uncertainty and no strategic uncertainty, 
thereby simplifying subjects' choices. 

We find differences in the consumption patterns between subjects that face 
full tax inclusive prices versus those who face the tax exclusive prices 
(and with the taxes added on at the checkout). More specifically, we find 
that subjects in the tax exclusive treatment purchase, on average, 31 
percent less goods than subjects in the tax inclusive treatment. Given 
that the 16% sales tax, this represents an overall price elasticity of 
roughly 2.  Moreover, we find that there is some learning over time as the 
effect weakens in later rounds of the experiment.
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