Kinship Taxation in the Lab and in the Field: Constraint to Microenterprise Growth?

By combining a lab-in-the-field approach and a randomised controlled trial, this study examines the pressure from family and friends to share income as a constraint to microenterprise growth. 

Low-income economies are characterized by a large number of informal microenterprises, many of which have high marginal return to capital—raising the question of why so few are able to grow. One understudied hypothesis proposed in the literature is that of external pressure, such as the pressure from family and friends to share income. This project examines whether kinship taxation is a constraint on microenterprise growth. Specifically, the research will address the questions of how large this informal tax is, who is most affected by it, how it changes with income, and what the effect on real-world outcomes such as investment is.

Answering these questions requires a measure of the ‘marginal informal tax rate’ faced by an entrepreneur, which the researcher will discover through a lab experiment eliciting the willingness-to-pay to hide income from family and friends. This field experiment will be done in coordination with a cash-transfer randomized control trial, and the cash transfer will be used as an instrument for tax rates (since an entrepreneur with relatives receiving cash transfers will likely face a different tax rate than one whose relatives do not) in order to identify any distortions in investment and savings.

Results from this project will improve existing models of micro-entrepreneurship, and provide empirical evidence to existing models proposing that kinship taxation could lead to poverty traps. Identifying constraints to microenterprise investment such as the kinship tax can also impact the design of microenterprise interventions, through areas such as which types of entrepreneurs are targeted.