Review of Behavioral Economics > Vol 9 > Issue 3

The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence

Miguel A. Fonseca, University of Exeter, UK, and NIPE, Universidade do Minho, Portugal, , Lutfi Rahimi, American University of Afghanistan and Biruni Institute, Afghanistan,
Suggested Citation
Miguel A. Fonseca and Lutfi Rahimi (2022), "The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence", Review of Behavioral Economics: Vol. 9: No. 3, pp 185-221.

Publication Date: 26 Sep 2022
© 2022 M. A. Fonseca and L. Rahimi
Behavioral economics,  Experimental economics,  Labor economics,  Public economics,  Taxation
JEL Codes: C91, J20, H24, H26
Cash windfallsreal efforttax complianceexperiments


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In this article:
1. Introduction 
2. Experimental Design and Procedures 
3. Results 
4. Discussion 
5. Conclusion 


We examine the effect of cash windfalls on the supply of effort and tax compliance in a high stakes, real effort laboratory experiment. Income windfalls have a negative effect on effort, which mirrors existing evidence from the field. Tax compliance on labor income is only marginally affected by windfalls. When windfall income is taxable, we find a positive relationship between windfall size and compliance. We find no evidence that taxpayers switch from one type of evasion to the other as a function of whether windfalls are taxable or not. While compliance levels are lowest among the most productive, there are no differential effects of windfalls on compliance along the productivity dimension.