<img src=cid:_2_45493D0845ACAFC40046833900257966>
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<br><font size=2 face="sans-serif">Málstofa á vegum Hagfrćđideildar </font>
<br><font size=2 face="sans-serif">The Effect of Tax Inclusive and Exclusive
Prices on Demand </font>
<br><font size=2 face="sans-serif">Oddi, 3. hćđ, föstudaginn 16.des. kl.
11:00-12:00</font>
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<br><font size=2 face="sans-serif">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. </font>
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<br><font size=2 face="sans-serif">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). </font>
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<br><font size=2 face="sans-serif">Naomi Feldman er hagfrćđingur í rannsókna-
og tölfrćđideild seđlabankans í Washington. Hún lauk doktorsprófi frá University
of Michican 2004. Megináhugamál eru fjármál hins opinbera, einkum viđbrögđ
viđ skattastefnu. Hún hefur rannsakađ skattasniđgöngu og framlög til mannúđarmála.</font>
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<br><font size=2 face="sans-serif">Abstract</font>
<br><font size=2 face="sans-serif">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. </font>
<br>
<br><font size=2 face="sans-serif">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. </font>
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<br><font size=2 face="sans-serif">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. </font>
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<br><font size=2 face="sans-serif">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.</font>