Can Experimental and Behavioral Economics Inform Public Policy? Lesson from a Tax Compliance Experiment

During last two decades, experimental and behavioral economics have become one of the most flourishing parts of economics. Their results usually indicate regularities which contradict the economic model based on homo economicus concept. The analysis introduced in this paper illustrates the possibilities and limits of the experimental method's contribution in policy making. Although there are several doubts related to the external validity of the experimental results, there is a potential of getting information on behavior of economic agents which can hardly be obtained by other method. Results of the experiment indicate that increasing probability of an audit appears to be more effective in enhancing tax compliance compared to increasing penalty rate (with constant audit rate). The control also ensured higher and more stable increase in contributions to a public good.