Within-year uncertainty and perception of year-end work incentives

While taxes are based on year-end income, people often make multiple labor supply decisions during the year and face uncertainty about the next month’s earnings. Using a regression discontinuity approach, we show that the effects of information about the year-end tax-benefit schedule depend on the stability of earnings of Norwegian welfare recipients. Consistent with a simple model of (mis-)perceived incentives, individuals with stable earnings respond to the mid-year treatment by modifying their year-end earnings target while those with variable earnings do not display any response. We find no impact on average earnings, but find that the information treatment caused an increase in the mass of earnings around the kink—especially so for workers with stable earnings. Our findings suggest that the targeting efficiency and the value of information policies depend on the stability of the labor environment.