This experimental study jointly examines tax evasion and labor supply under social versus monetary enforcement within a prospect theory-based framework. This study’s theoretical model endogenizes labor supply and the authors test it using a real-effort laboratory experiment with randomized social, monetary and control treatments, enabling causal identification of behavioral responses. Results indicate that both penalties significantly reduce tax evasion, with social penalties generally more effective, though their deterrent power weakens at higher tax rates. Social penalties work best for individuals with high tax morale and social exposure, whereas monetary fines are more effective for risk-averse participants. Enforcement also influences labor supply, with effort decreasing as tax rates rise. These findings reveal that compliance is shaped by psychological and social costs alongside financial deterrence, offering insights for designing context-sensitive tax policies. Developing this theoretical framework and testing these casual mechanisms empirically is the authors’ main contribution.
SARWAR et al. (Thu,) studied this question.