No. 41: How does trust affect concessionary behavior in tax bargaining?

Abstract

We study the bargaining behavior between auditor and auditee in a tax setting and scrutinize the effect of interpersonal trust and trust in government on both parties’ concessions. We find evidence that both kinds of trust affect the concessionary behavior, albeit in different ways. While trust in government affects concessionary behavior in line with intuitive predictions, we find that interpersonal trust only affects tax auditors. For high interpersonal trust, the alleviating effect of high trust in government on tax auditors’ concessions is less pronounced. Our findings help tax authorities to shape programs to enhance compliance in an atmosphere of trust.