Firm Networks and Tax Compliance: Experimental Evidence from Uganda

Abstract

How do policy interventions diffuse through firm transaction networks? We design a novel two-stage randomization strategy that assigns a tax enforcement treatment at the seller–buyer link level and ensures separation within the network to identify direct and spillover effects. Using Ugandan transaction-level VAT data, we find that treated links correct 23.8% of reporting discrepancies, fourteen times the control rate. Corrections are driven by sellers---even when only buyers receive letters---providing evidence of communication between firms. Spillovers extend to other transactions, with persistent improvements in post-treatment reporting. Sellers evade by reclassifying firm-to-firm transactions as unverifiable final sales, weakening the VAT's self-enforcing property.