There is a reason why we have tax offices, inspectors and auditors, fines and the threat of imprisonment for offences such as tax evasion and bribery. They exist not only because of past experience but also because of the theory known as the economics of crime, which says that people are both selfish and rational. Whether they will cheat depends on whether the returns outweigh the potential costs.
According to this theory, higher returns on fraud and other immoral behaviour will mean that more people will behave immorally. On the other hand, sanctions should have the opposite effect. However, Marie Villeval tested these assumptions in laboratory economic experiments, which showed that human behaviour is not as simple and unambiguous.
“Obviously, there are people who will cheat if they get the chance and if it is profitable for them. Then there are people who must be absolutely sure that nobody will be able to identify them before they start cheating. Finally, there are people who will stay honest under any circumstances,” explains the economist. She added that this was one of the results of recent research where experts from the University of Michigan returned “lost” wallets containing money and IDs to various institutions in a number of countries and followed up on how many of them were actually returned to their “owners”. The rate of returned wallets was surprisingly high and increased when they contained more money.
Various experiments have shown that when making decisions about their behaviour, people consider not only direct costs and returns but also elements of ethics and faith; even lying carries a certain weight. To some extent, people also take into account how their behaviour is perceived and judged by the people around them. “Usually, people lie ‘just a little’ or behave honestly simply because they do not want to look like cheats.”
How to observe cheating in action
Villeval and her colleagues were also looking for ways to observe such behaviour in real life. For obvious reasons, it is rather difficult to observe corruption or tax evasion. Eventually, the experimenters settled on observing passengers on Lyon public transport, where it is easy to identify fare dodgers who break the rules – you simply have to notice who did not mark their ticket. During the experiment, the researchers focused on how riding without a ticket and ticket inspections influence subsequent behaviour. “We would get off with the people we selected. A hired actor would pretend that they just found a banknote and would ask the person whether they had lost it. We wanted to see whether the people would accept the banknote or not,” says Villeval.
On average, fare dodgers were more willing to accept the banknote. The researchers also studied whether people behave differently when they have just had their ticket checked. Those who were caught without a ticket and had to pay a fine took the money more often. Surprisingly enough, however, the results were the same for those who were inspected and had a valid ticket. “It is not entirely clear why it should be so. Perhaps it is some kind of balancing – something like ‘Since I have just passed a check, I can now be a little dishonest’. Maybe this is because you are less likely to cheat when you can expect to be checked, but nobody checks your behaviour in the street, so cheating is more likely. Moreover, it is not illegal to take money found, it is just immoral,” notes Villeval.
The power of selective memory
The French researcher obtained even more interesting results in an experiment that followed tax evasion. Her objective was to determine how people’s decisions change based on their knowledge of the behaviour of others. Surprisingly, when the participants were informed about other people’s income and tax evasions, it had no effect at all.
Researchers also examined whether people can be swayed by the honest and dishonest behaviour of others. “When they were able to choose the type of people or behaviour that they would like to know about, there was a noticeable impact. Dishonest people asked for more information about those they suspected to be dishonest and then cheated even more,” says Villeval. Further experiments showed that honest people do not actively seek others who behave in the same way and are not particularly influenced by the examples set by others. However, if they happen to be in a group of dishonest people and benefit from the situation, they accept it and do not attempt to change anything.
Researchers are also trying to explain why people behave morally on some occasions and immorally on others. There are several strategies to defend one’s questionable behaviour. Avoiding information, which was mentioned above, is one of them; this also involves avoiding certain types of behaviour, such as charitable donations. You can also avoid responsibility by selecting a group of people who approve of such behaviour or make the excuse that as an individual, your behaviour will not have any effect anyway. Furthermore, people are much more likely to remember situations when they were generous with someone but are quick to forget when they lied or behaved selfishly.
Based on these results, Villeval is convinced that simply revising the classic theory, which is behind many checks and sanctions, is not enough – we need to come up with a completely new concept of the economics of crime that will be better able to predict people’s behaviour and allow us to set better rules.
One of the examples that she gave was a change in the way taxes are collected in France. Previously, people reported their income annually and paid their taxes retrospectively based on what they reported. In the new system, the taxes are collected immediately, and the amount is therefore proportionate to current income situation of the taxpayers. “This reform significantly reduced tax evasion, not least because people actually remember their current earnings, which they might have simply forgotten to report before,” concludes Villeval.