Knowledge that Transforms

We investigate how long an insolvent debtor can avoid default when survival benefits creditors collectively, but individual creditors gain from early repayment. Standard theory predicts that debt is not rolled over and default is immediate. Previous experimental studies of related environments suggest that liquidation is delayed, and we confirm that pattern here. We then study how secondary markets affect outcomes. The duration of the credit pool is unaffected, but average net payoffs increase because claims are held longer before redemption. With markets, realized payoff dispersion is significantly higher. Prices do not predict liquidation timing but correlate with realized payoffs.

Tax authorities often leave the consequences of non-compliance unspecified. We examine how disclosing those consequences affects tax payment and income reporting in four experiments. In a field experiment with HM Revenue and Customs, letters randomized to more than 200,000 taxpayers with outstanding income-tax debts increased payment when they warned of unspecified further action. Messages specifying financial or administrative costs did not produce the same benefit. An online payment experiment with 2050 taxpayers across fourteen conditions, including 1194 in the principal factorial design, found that revealing the maximum fine lowered the stated likelihood of paying. The reduction occurred at both modest and severe revealed maxima. It also occurred among participants who learned that the fine exceeded their prior estimate, contrary to the prediction from belief updating. An incentivized experiment with 827 participants extended the effect to income declarations with money at stake, although declarations differed between the two disclosed maxima in this setting. A laboratory experiment with 239 participants recorded differences in pupil dilation across enforcement messages without detectable differences in measured visual attention. Together, the findings suggest that ambiguity about enforcement consequences contributes to compliance. The physiological evidence is consistent with an affective account of this relationship. Disclosing a maximum penalty can therefore have a behavioral cost that tax authorities should consider when communicating enforcement policy.