Strategic Thinking in Tax Reporting

Behavioral game theory experimentally investigates strategic interaction by combining insights from game－theoretic models and models of human information processing. Given limited rationality, what level of strategic thinking do individuals achieve in a tax reporting game? The experiment in this study reveals that tax auditors and firms adjust their strategy based on a belief about the opponent’s response to parametric change, but do not correctly recognize that the opponent does likewise, indicating that tax auditor’s strategic decision is biased by normatively irrelevant information.