[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.]

Consumption taxes of various forms are of increasing importance worldwide. This study employs a laboratory market design to investigate differential market reactions to three consumption tax forms while holding all other factors constant. Ten laboratory markets were conducted, each involving nine volunteer participants. Market participants were randomly assigned to roles analogous to wholesalers, retailers, or consumers of a market good. The three tax forms were (1) a sales tax imposed on retail consumers of a commodity, (2) a gross‐receipts tax imposed on retail sellers, and (3) a value‐added tax imposed on sellers at two levels of production. At least three markets were conducted under each tax regime as a basis for experimental comparison. The tax rates used in each structure were chosen so that a competitive model would predict different equilibrium prices but the same tax burdens (the sum of explicit and implicit taxes) across the three tax regimes. Results generally support these predictions, with somewhat stronger support for equivalent tax revenues (explicit taxes collected) than for equivalent tax incidence (distribution of tax burdens after price adjustments). Observed tax incidence differences suggest that market agents who are called upon to explicitly pay taxes actually bear relatively lower tax burdens after implicit tax price adjustments. In general, however, price shifting is consistent with the competitive model, supporting the economic dictum that the choice among alternative designations of taxpaying agents is more a question of form than of economic substance. Résumé. Les taxes à la consommation revêtant diverses formes augmentent en importance à travers le monde. Les auteurs ont conçu un modèle de marché expérimental dans le but d'étudier les différentes réactions du marché à trois formes de taxe à la consommation, tout en maintenant constants l'ensemble des autres facteurs. Dix marchés expérimentaux ont été créés, chacun d'eux faisant intervenir neuf participants volontaires à qui étaient attribués aléatoirement des rôles analogues à ceux de grossistes, de détaillants ou de consommateurs d'un marché de produits. Les trois formes de taxe étaient les suivantes: (1) une taxe de vente s'appliquant aux consommateurs d'un bien sur le marché de détail, (2) une taxe sur les encaissements bruts s'appliquant aux détaillants et (3) une taxe sur la valeur ajoutée s'appliquant aux vendeurs, à deux échelons de production. Au moins trois marchés sous chaque régime fiscal ont servi de base de comparaison expérimentale. Les taux utilisés dans chaque structure ont été choisis de telle sorte qu'un modèle concurrentiel arrive à des prix d'équilibre différents mais à une fardeau fiscal identique (la somme des taxes explicites et implicites) sous les trois régimes. Dans l'ensemble, les résultats obtenus confirment ces prédictions, plus encore dans le cas des recettes fiscales équivalentes. Les différentes incidences fiscales observées donnent à penser que les agents du marché de qui l'on réclame explicitement des taxes supportent, en réalité, un fardeau fiscal relativement moins élevé, une fois opérés les ajustements de prix relatifs aux taxes implicites. De manière générale, cependant, les variations de prix sont conformes au modèle concurrentiel, ce qui corrobore cet axiome économique selon lequel le choix des agents à qui doit être attribué le rôle de contribuable est davantage une question de forme que de substance économique.

[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.]