Compliance and the Subjective Audit Probability

Abstract

This paper studies the role of beliefs about how own appearance and performance affect the subjective probability of being audited in a compliance situation, e.g. at customs. In an experiment in which underreporting has a higher expected payoff than truthful reporting we find an increase in compliance of about 80% if subjects have reason to believe that their appearance or performance influences their subjective audit probability. We find that higher compliance is driven by subjective beliefs, rather than by social and psychological effects of personal contact. In contrast, we do not find evidence for individuals who believe that their personal performance can reduce the subjective probability of an audit. Our results suggest that individuals’ beliefs about their subjective audit probability are important. An institutional framework with personal contact and with discretion about whom to audit can therefore improve compliance.