The Organizational Design of Intelligence Failures

While the detection, and prevention, of the September 11, 2001 plot would have been ideal, I argue that the more major intelligence failures occurred after the attacks of September 11. The erroneous intelligence concerning the WMD presence in Iraq permitted the Bush Administration to order the invasion of Iraq. Systematic underestimates of the budgetary costs and personnel requirements of the war meant that Congress did not give the matter the debate that it warranted. Finally, incorrect (or incomplete) intelligence concerning the extent of the informal opposition to the U.S. led forces resulted in inadequate numbers of allied forces being deployed and a protracted period of conflict and disruption in Iraq. These facts are all well known to anyone who reads newspapers. I make three arguments in this paper. First, the collection of the intelligence data and its evaluation does not occur in a vacuum. There must always be an organizing theory that motivates the collection and evaluation of the data and that this theory is formulated at the highest levels of the decision making process. Second, it is not possible to construct a truly neutral or objective (analytical) hierarchy. Third, it is impossible to separate the analytical evaluation of the data from the decision that will be based on such evaluation. As an inevitable consequence of these arguments, intelligence analysis and the resulting conclusions are driven by top-down considerations rather than bottom-up as has been argued by some reviewers of recent intelligence failures. Key Words: stable coalitions, self-enforcing agreements, compliance, enforcement, public goods

Giving To Ingrates?

Models for voluntary provision of public goods predict free riding is rational unless the model includes a motive for the act of giving referred to as a “warm glow” in the literature. The source for this warm glow is likely to include the gratitude of the recipient. The experimental setting employed here controls for positive or negative reciprocity from the recipient of a gift to isolate the individual satisfaction from the act of giving as the remaining motivation for giving. The experimental treatment is whether the recipient is informed that his/her payoff includes a “gift” from another participant (donor or giver). The central finding is that donations increase when the donor/giver knows that the recipient knows that a gift has been provided. Key Words:

Audit Certainty, Audit Productivity, and Taxpayer Compliance

Strategies for dealing with evasion include such standard policies as stricter enforcement (e.g., increased audit rates, more extensive audits, larger penalties). However, the exact responses of taxpayers to these enforcement measures are quite difficult to measure with existing field data, and so are not known precisely. In this paper we use experimental methods to examine how individuals respond in their compliance decisions to a "certain" probability of audit and to information concerning the "productivity" of an audit. Our design informs some individuals that their return will be audited with certainty prior to making their compliance decision, while other individuals receive information that they will not be audited; we also inform individuals of the productivity of the audit by stating how much unreported income will be discovered via the audit. We find that the announcement of audits increases the compliance rate of those who are told that they will be audited. However, the compliance rate of those who know that they will not be audited falls, and the net effect is that overall compliance falls. Working Paper 06-4

Do Individuals Comply on Income Not Reported by Their Employer

Individuals (e.g., the self-employed and those earning casual wages such as tips) with income not reported to the tax authority by a third party may be less likely to be detected evading taxes relative to the case in which their income is subject to third-party reporting. However, their compliance responses - to changes in the proportion of income that is reported to the tax authority, to changes in audit and tax rates, and so on - are largely unknown, in part because of the difficulty in obtaining information on individual choices in these situations. We use experimental methods to examine individual income tax compliance in settings where individuals differ in the portion of their income that is "matched" (or reported to the tax authority via third-party information) versus "nonmatched" (or not fully reported to the tax authority). Our results indicate that individuals who have relatively more non-matched income exhibit significantly lower tax compliance rates than individuals who earn relatively less non-matched income. Our results also indicate that higher income levels, higher tax rates, and lower audit rates lead to increased tax evasion, but with responses that vary depending upon the proportion of matched versus non-matched income. Working Paper 07-3

Taxpayer Information Assistance Services and Tax Compliance Behavior

The traditional "enforcement" paradigm of tax administration views taxpayers as potential criminals, and emphasizes the repression of illegal behavior through frequent audits and stiff penalties. However, an important trend in tax administration policies in recent years is the recognition that this paradigm is incomplete. Instead, a revised "service" paradigm recognizes the role of enforcement, but also emphasizes the role of tax administration as a facilitator and a provider of services to taxpayer-citizens. This research utilizes laboratory experiments to test the effectiveness of such taxpayer service programs in enhancing tax compliance. Our basic experimental setting mimics the naturally occurring environment: subjects earn income, they must choose whether to file a tax return, and they then must choose how much of their net income to report to a tax authority that may audit the subject. To investigate the effects of taxpayer services, we "complicate" these compliance decisions of subjects, and then provide "services" from the "tax administration" that allow subjects to compute more easily their tax liabilities. Our results indicate that uncertainty reduces both the filing and the reporting compliance of an individual. However, we also find that agency-provided information has a positive and significant impact on the tendency of an individual to file a tax return, and also on reporting for individuals who choose to file a return.tax evasion, tax compliance, behavioral economics, experimental economics

Hand in the Cookie Jar: An Experimental Investigation of Equity-based Compensation and Managerial Fraud

The use of equity-based compensation is an increasingly popular means by which to align the incentives of top management with that of the shareholders. However, recent theoretical and empirical research suggests that the use of equity-based compensation has the unintended consequence of creating the incentive to commit managerial fraud of the type being reported in the press. This paper reports experimental evidence showing that the amount of fraud committed by subjects is positively correlated with the level of equity, as is the level of effort. As well, the amount of fraud that is committed is negatively correlated with the probability of detection and subjects’ risk aversion. The experimental design permits the identification of causal relations in the directions just noted. Key Words:

Cass-Clay Creamery: A New Direction for an Old Brand

Consolidation and industrialization are increasingly important factors affecting the level of membership in cooperative businesses. This article presents information about the development of the dairy industry in North Dakota and its effect on Cass- Clay Creamery, a farmer-owned dairy cooperative. Students are asked to analyze decisions about branding and being acquired by another larger cooperative.Dairy, cooperative, acquisition, North Dakota, Cass-Clay, AMPI, Agribusiness,

North American Bison Cooperative and North Dakota Natural Beef LLC: Governance of a Contractual Alliance

In 2005, North American Bison Cooperative formed a contractual alliance with North Dakota Natural Beef, LLC. The alliance was formed in order to enable the cooperative to enhance returns from its physical and managerial assets by entering the natural beef market. This case describes the resources shared by the cooperative and LLC, how the alliance was governed, the risk of opportunism by the CEO and associated trust building and control mechanisms, and the benefits cooperative members received. Although the two companies operate under different business principles, cooperative members exercise indirect control over the resources they contribute to the venture.Agribusiness, Livestock Production/Industries,

Tax Break for Billionaires: How the Campaign Finance System Failed New York Taxpayers and Helped Luxury Developers

In January, the state Legislature quietly passed a multimillion-dollar tax subsidy for five Manhattan luxury towers, including One57 at 157 West 57th St. Governor Andrew Cuomo signed the big tax break as part of a larger housing bill on Jan. 30. The tax breaks for One57 and the four other towers are part of the 421-a program, a city program originally intended to spur development and later revised to encourage affordable housing construction as well. Affordable housing advocates agree that the program has long outlived its usefulness and effectiveness, and now essentially subsidizes luxury housing. Albany lawmakers approved the giveaway nevertheless, because a handful of developers wanted it, and expected it, after contributing heavily to the campaign chests of state legislators, party committees and the governor himself. Cuomo was the biggest recipient of campaign cash from the developers who benefited most directly. Assembly Democrats and Senate Republicans also raked in substantial contributions: $136,400 for the Assembly campaign committees and$98,000 for the Republican Senate Campaign Committee

Investigating Behavioral Responses to Positive Inducements for Filing Tax Returns

A significant amount of non-compliance associated with the personal income tax is due to the taxpayers who are not “in the system,” not having filed a tax return in the recent past or perhaps ever. We use experimental laboratory methods to examine two types of positive incentives for filing tax returns: tax credits and social safety net benefits, both of which are conditional on tax filing. Our experimental design captures the essential features of the voluntary income reporting and tax assessment system used in many countries. Human participants in a controlled laboratory environment earn income through their performance in a task. The participants must then decide whether to file a tax return and, conditional upon filing, how much income to report. Taxes are paid on reported income only. Unreported income of filers may be discovered via a random audit, and the participant must then pay the owed taxes plus a fine based on the unpaid taxes; non-filers are not subject to an audit. Inducements for filing are introduced in several alternative treatments. In one treatment we introduce a social safety net (e.g., unemployment replacement income) that is conditional on past filing behavior. In a second treatment we introduce tax credits that are available either to low income participants or to all income levels, but again only to those who file a tax return. Our results suggest that a tax credit increases filing but only if the credit is targeted to low income earners. The provision of a social safety net via unemployment benefits also has a positive, albeit indirect, impact on participation. Key Words: