The Impact of Compensation Level and Context on Income Reporting Behavior in the Laboratory

This study examines two methodological issues in judgment and decisionmaking studies in accounting—compensation level and context—using an income reporting task. Previous research has not examined the joint effect of compensation level and context. Further, findings in previous research about these two variables may not extend to specific contexts such as an income reporting context. Specifically, the study examines the effect of different levels of compensation (including zero and very high values) on participants' income reporting behavior in the laboratory. It also examines whether the use of tax‐specific instructions results in differences in income reporting behavior compared to the use of context‐free instructions. The study predicts that compensation level should not affect reporting income levels when the treatment is tax‐specific due to the influence of social norms. The study also makes predictions based on expected utility theory in the context‐fee treatment. An experimental study was carried out in India using college students that manipulated two types of context (tax‐specific and context‐free) and six levels of compensation, including no compensation, grouped into three levels: Low, Medium, and High. The results show that compensation levels did not affect participants' income reporting behavior in the taxspecific treatment but in the context‐free treatment, participants' income reporting behavior was negatively affected by the introduction of adequate compensation.