Heterogeneous Responses in Payments Under the Table
Policy Context
Many developing countries struggle with low state capacity due to high level of tax evasion in labor markets. Several papers have studied how to reduce informality from non-registered establishments. However, little is known about addressing layers of informality within registered establishments: informal employees in registered establishments and even formal employees in registered establishments can receive part of their wages paid off-the-books, which we referred to as “Payments Under the Table” (PUTs), following previous work shown in Feinmann et al. (2022). We leverage experimental evidence on firms’ knowledge about labor lawsuits, the main whistleblowing institutions where workers can report employers for informal payments. This allows us to study the deterrence effects on reported wages and employees, as well as firms’ profits, allowing us to identify how employer and employee split the tax savings.
Study Design
The project is a nationwide randomized controlled trial (RCT) involving over 67,000 formal private-sector firms in the Dominican Republic in joint work with the tax authority. The intervention was implemented in November 2024 via pop-up messages on the Dirección Nacional de Impuestos Internos (DGII) platform. Firms were randomly assigned to receive either neutral reminders (control) or deterrence messages emphasizing risks associated with labor lawsuits and the potential use of labor court data to trigger tax audits. Researchers stratified firms by prior employment status. Firms with employees were assigned to messages targeting wage underreporting (PUTs), while all firms—including those with no declared employees—could receive messages targeting general informality. Each main treatment arm has a “soft” (awareness) and a “strong” (propagation) version. The difference is that the “strong” intervention also include information on how a labor lawsuit can trigger a tax audit. Researchers also included a novel arm targeting profit underreporting, tied to the legal requirement that firms share 10% of profits with employees. Pre- and post-intervention data are derived from administrative records covering tax filings and monthly matched employer-employee social security data. The first is declared annually covering the previous calendar year, meaning that it will be available in July 2026. The research team has preliminary results based on social security data, where we can observe number of employees and reported wages.
Results and Policy Lessons
While the full effects will be assessed after all post-treatment data become available, early evidence shows encouraging patterns. Pooling all treatment arms, the intervention led to a 1% increase in total payroll, with effects twice as large for among small firms, partially driven by an increase in the number of reported workers. Effects are more pronounced in response to the “strong” message which highlights the risk of audit.
Importantly, the analysis shows no evidence of attrition or selective reporting post-intervention, reinforcing the integrity of the experimental design. Heterogeneity in responses aligns with previous literature; responses are larger for smaller firms, which are more likely to both receive the information and have more underreporting. However, researchers don’t find that the content of the message is particularly relevant, meaning that responses are similar regardless of whether the message is about informality, PUTs or profit sharing. This is theoretically ambiguous but consistent with behavioral economics literature. The research team continues to collect firm-level profit data and anticipate deeper analyses of compliance behavior and firm heterogeneity in the coming months. Moreover, we aim to evaluate how profits respond in those firms where reported wage go up to shed light on bargaining powers.
