[Using laboratory market data, this study demonstrates that consumers respond differently to a market event depending on the information reported about the event. Specifically, they respond more rapidly to an economically predicted price increase when they are informed that sellers' marginal costs have increased, but they resist price increases if they know that the sellers' profits have increased. These information effects are based on the principle of dual entitlements, which posits that purchase decisions are influenced not only by the direct economic utility of the purchase, but also by consumers' perceptions of the equity or fairness of a negotiated price. Survey evidence from prior studies indicates that consumers (buyers) justify price increases driven by increases in sellers' costs, but resist price increases that increase sellers' profits. This study goes beyond surveys to investigate these predictions in a market setting affected by an economic event that simultaneously increases both the marginal costs incurred and the profits earned by sellers. Specifically, we examine the combined effect of a change in the sellers' tax rate and tax base. Nine laboratory markets in three separate financial information structures were conducted to investigate the predicted information effects. Each market had ten traders (five buyers and five sellers), for a total of 90 subjects. In three markets, buyers were apprised of an increase in sellers' marginal tax costs. In three other markets, buyers were informed of an increase in sellers' after-tax profits. Finally, three control markets with no information disclosures served as a baseline. Subjects in each market were student volunteers who received their market profits in real cash, in conformance with the tenets of induced-value theory. The results have implications for the financial disclosures volunteered by firms or mandated by regulatory bodies. While the accounting literature has traditionally stressed information effects on investors (Lev 1989), the body of users affected by financial reporting is much larger and includes the consumers who purchase the goods and services of disclosing firms (Financial Accounting Standards Board 1978, par. 24). This study suggests that financial disclosures can influence consumer behavior in competitive markets for goods and services.]

[In 1984, the U.S. Supreme Court ruled that the Internal Revenue Service (IRS) has the authority to summon the workpapers of independent auditors when those workpapers are relevant to the collection of taxes. The exercise of this authority may in some circumstances make the tax costs of corporate audit clients dependent on the disclosures they make to auditors regarding sensitive tax information. This is because such disclosures are documented in auditors' tax accrual workpapers. Many in the accounting profession have argued that clients would reduce disclosures of sensitive tax information to their auditors if the IRS were to routinely access audit workpapers and that this would lead to less accurate financial statements. Underlying this argument are assumptions about the relationships between a client's incentives to disclose tax information to an auditor, the diagnosticity of audit procedures that can serve as substitutes for client disclosures, and the quality of financial reporting. The purpose of this study is to obtain experimental evidence regarding these relations in a laboratory market experiment. A series of four laboratory markets was conducted, in which 32 under-graduates served as subjects. Each market consisted of eight participants, three "auditors" and five corporate audit "clients." There were two independent variables. The first was IRS access, which was operationalized as the effect of client-auditor communication on the likelihood that a contingent liability would become an actual liability. Under conditions of IRS access, client disclosure increased this likelihood. The second independent variable was the level of diagnosticity of an audit procedure that served as a substitute for client disclosure. The major dependent measures were client disclosures of specific contingent tax liabilities and the accuracy of the liability estimates made by clients. The results from the laboratory markets suggest several inferences regarding the effects of IRS access to auditors' workpapers. First, IRS access may reduce client disclosures regarding specific arguable tax return positions. Second, a decrease in client disclosure may not necessarily lead to a decrease in financial statement accuracy. Instead, the client's estimate of the tax liability may serve as a reliable substitute for disclosures regarding the specific arguable tax return positions underlying that estimate. Third, IRS access may reduce the number of arguable tax return positions that clients adopt. Taking fewer arguable positions reduces the need for client disclosure and may be an adaptive strategy for minimizing overall tax and audit costs. Fourth, for each of the three variables discussed above (i.e., disclosure, accuracy, and the adoption of contingent liabilities), the effect of IRS access may be contingent on the diagnosticity of any audit procedures that can serve as substitutes for client disclosure. For example, the clients in our laboratory markets were less inclined to withhold information regarding specific contingent liabilities in an environment where auditors could more easily detect this behavior. This result suggests that any inhibiting effect of IRS access on client disclosure may be smaller in situations where auditors have alternative means for assessing the accuracy of the tax provision. Thus, an important issue for future research is assessing the effectiveness of substitutes for client disclosure in real world audit settings.]