Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/20614
Authors: 
Riedl, Arno
van Winden, Frans
Year of Publication: 
2004
Series/Report no.: 
IZA Discussion paper series 1344
Abstract: 
This paper is concerned with a policy oriented macroeconomic experiment involving an 'international' economy with a relatively small 'home' country and a large 'foreign' country. It compares the economic performance of two alternative tax systems as a means to finance unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system. The two systems are applied to the home country, while the wage tax system always obtains in the foreign country. In stark contrast with expectations of experts the sales tax system clearly outperforms the wage tax system, using standard economic indicators. It is argued that producers' reluctance to incur costs up-front while being uncertain about product prices can explain this outcome. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects have to be taken into account also in applied macroeconomic models.
Subjects: 
laboratory experiment
wage tax
sales tax
macroeconomic policy
behavioral economics
JEL: 
A10
E62
D80
H20
D21
C91
C90
Document Type: 
Working Paper

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