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Conscience as a deterrent to free riding

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Purpose ‐ The purpose of this paper is threefold: conceptually, to demonstrate that ethical behavior is rational; theoretically, to illustrate that conscience can be readily incorporated into an expected utility framework; and empirically, to investigate whether conscience is an effective and economically important deterrent to free riding. Design/methodology/approach ‐ An analogy to risk aversion demonstrates the rationality of ethical behavior. An expected utility model of tax evasion is then augmented by a conscience parameter and calibrated using recent empirical data from a transition economy. Findings ‐ Taxpayers in Moldova are estimated to have engaged in roughly 10-33 percent as much tax evasion as predicted by a model of amoral preferences. The difference amounts to between $11 million and $19.6 million in government revenues annually between 1997 and 2000. Research limitations/implications ‐ The model is calibrated with aggregate data and consequently the empirical results are approximate. Replications with disaggregated data sets would provide useful confirmation of the findings. Practical implications ‐ Economic models of individual decision-making which assume amorality and ignore conscience vastly overestimate the level of free riding. In practice, compliance with taxation and other social regulation may be amenable to moral suasion as well as law enforcement. Originality/value ‐ Contrary to the predominant neoclassical paradigm of amoral self-interest, this paper highlights the importance of ethical preferences in modeling and measuring economic behavior. Researchers can more accurately predict and policymakers can more effectively influence individual decision-making by taking account of moral sentiments.
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Keywords: Ethics; Income taxes; Moldova; Utility theory

Document Type: Research Article

Publication date: August 1, 2006

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