Does prospect theory explain ethical decision making? Evidence from tax compliance. (October 2021)

• Record Type: Journal Article
• Authors: Austin, Chelsea Rae; Bobek, Donna D.; Jackson, Scott
• Is Part Of: Accounting, organizations and society. Volume 94(2021)
• Publication Date: 2021-10
• Subjects: Tax compliance -- Prospect theory -- Moral disengagement -- Ethical decision making; Accounting -- Periodicals; Social accounting -- Periodicals; Comptabilité -- Périodiques; Bilan social -- Périodiques; 657.05
• DOI: 10.1016/j.aos.2021.101251
• Languages: English
• ISSNs: 0361-3682

Abstract

Abstract: Prospect theory is often used to predict individuals' risky tax decisions. For example, individuals who are in a tax due (refund) position are predicted to engage in more (less) tax noncompliance. This is known as the "withholding phenomenon". However, tax noncompliance is not just risky, it is also unethical. We hypothesize that because there is an ethical component inherent in this risky decision, the feelings described by prospect theory are insufficient to cause increased risk-seeking. In a series of experiments, we show that moral disengagement is the primary theoretical mechanism that explains noncompliant tax behavior. The feelings evoked from being in a loss domain provide motivation for individuals to morally disengage, while moral disengagement is directly related to noncompliant tax behavior. We also develop an intervention that deters individuals from morally disengaging, specifically when they are in a tax due position. These results have important practical and theoretical implications.