nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒12‒29
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Human Capital Risk, Contract Enforcement, and the Macroeconomy By Krebs, Tom; Kuhn, Moritz; Wright, Mark L. J.
  2. High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk By Kindermann, Fabian; Krueger, Dirk
  3. Financial frictions in the Euro Area and the United States: a Bayesian assessment By Stefania Villa
  4. Optimal taxation with home production By Conny Olovsson
  5. Adverse Selection, Risk Sharing and Business Cycles By Veracierto, Marcelo
  6. Bubbles and unemployment in an endogenous growth model By Ken-ichi Hashimoto; Ryonfun Im
  7. Quelle méthodologie pour une étude des modèles DSGE ? Suggestions à partir d'un état des lieux des recherches sur la modélisation. By Francesco Sergi
  8. Constrained Efficiency with Search and Information Frictions By S. Mohammad R. Davoodalhosseini
  9. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  10. Job-Security Provisions and Incomplete Markets By Etienne Lalé
  11. Collateral Risk, Repo Rollover and Shadow Banking By Shengxing Zhang
  12. A DSGE Model of China By Dai, Li; Minford, Patrick; Zhou, Peng
  13. Regímenes Monetarios y Volatilidad del Tipo de Cambio Real: El Caso Peruano, 1995–2012 By Rodolfo Cermeño; Julio Mamani-Palacios
  14. International capital flows, external assets and output volatility By Hoffmann, Mathias; Krause, Michael; Tillmann, Peter
  15. Financial Constraints in Search Equilibrium By Boeri, Tito; Garibaldi, Pietro; Moen, Espen R
  16. Government Spending Multipliers and the Zero Lower Bound in an Open Economy By Charles Olivier Mao Takongmo
  17. Optimal progressive taxation in a model with endogenous skill supply. By Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
  18. International Financial Integration and Crisis Contagion By Devereux, Michael B; Yu, Changhua
  19. How good are out of sample forecasting Tests on DSGE models? By Minford, Patrick; Xu, Yongdeng; Zhou, Peng
  20. Relative Effects of Labor Taxes and Unemployment Benefits on Hours Worked per Worker and Employment By Been-Lon Chen; Mei Hsu; Chih-Fang Lai
  21. Aging and Deflation from a Fiscal Perspective By Mitsuru Katagiri; Hideki Konishi; Kozo Ueda
  22. Replica Core Equivalence Theorem: An Extension of Debreu-Scarf Limit Theorem to Double Infinity Monetary Economies By Ken Urai; Hiromi Murakami
  23. Growth and Unemployment in the Presence of Trend Inflation By Mewael F. Tesfaselassie
  24. A quantitative analysis of the retail market for illicit drugs By Manolis Galenianos; Alessandro Gavazza
  25. Loss Aversion and the Asymmetric Transmission of Monetary Policy By Gaffeo, Edoardo; Petrella, Ivan; Pfajfar, Damjan; Santoro, Emiliano
  26. Informality and government enforcement in Latin America By Rodrigo Ceni

  1. By: Krebs, Tom (University of Mannheim); Kuhn, Moritz (Dept. of Economics, Adenauer); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured against human capital risk. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.
    Keywords: Human Capital Risk; Limited Enforcement; Life Insurance
    JEL: D52 E21 E24 J24
    Date: 2014–10–22
  2. By: Kindermann, Fabian; Krueger, Dirk
    Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
    Keywords: income inequality; progressive taxation; social insurance; top 1%
    JEL: E62 H21 H24
    Date: 2014–10
  3. By: Stefania Villa (KU Leuven; University of Foggia)
    Abstract: This paper assesses the empirical relevance of financial frictions in the Euro Area (EA) and the United States (US). It provides a comprehensive set of comparisons between two models: (i) a Smets and Wouters (2007) (SW) model with financial frictions originating in non-financial firms à la Bernanke et al. (1999) (SWBGG); and (ii) a SW model with frictions originating in financial intermediaries, à la Gertler and Karadi (2011) (SWGK). Proved that the introduction of financial frictions in either way improves the models' fit compared to a standard SW model, the empirical comparisons reveal that the SWGK model outperforms the SWBGG model both in the EA and the US. Two main factors explain this result: first, the magnitude of the financial accelerator effect; and second, the role of the investment-specific technology shock in affecting financial variables.
    Keywords: Financial frictions, DSGE models, Bayesian estimation.
    JEL: C11 E44
    Date: 2014–12
  4. By: Conny Olovsson (Sveriges riksbank)
    Abstract: Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model where agents buy consumption goods and services, and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive, and the welfare gains from switching to optimal taxes are large.
    Date: 2014
  5. By: Veracierto, Marcelo (Federal Reserve Bank of Chicago)
    Abstract: I consider a real business cycle model in which agents have private information about an idiosyncratic shock to their value of leisure. I consider the mechanism design problem for this economy and describe a computational method to solve it. This is an important contribution of the paper since the method could be used to solve a wide class of models with heterogeneous agents and aggregate uncertainty. Calibrating the model to U.S. data I find a striking result: That the information frictions that plague the economy have no effects on business cycle fluctuations.
    Keywords: Adverse selection; risk sharing; business cycles; private information; incentives; optimal contracts; computational methods; heterogeneous agents
    JEL: C63 C68 D31 D82 E32
    Date: 2014–10–22
  6. By: Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Ryonfun Im (Graduate School of Economics, Kobe University)
    Abstract: We construct a continuous-time overlapping-generations model with labor market friction in order to examine the relationship between bubbles, economic growth, and unemployment. We show that the existence of bubbles is contingent upon the equilibrium unemployment rate. Asset bubbles can (not) exist when unemployment is low (high), which leads to higher (lower) interest rates and economic growth through labor market efficiency. Hence, economic growth under the bubble regime where bubbles can exist is higher than that under the non-bubble regime where bubbles cannot exist. Furthermore, policy or parameter changes that have a positive effect on the labor market shift the economy from a non-bubble regime to a bubble regime.
    Keywords: overlapping generations, endogenous growth, labor market friction, unemployment
    JEL: J64 O41 O42
    Date: 2014–12
  7. By: Francesco Sergi (Centre d'Economie de la Sorbonne)
    Abstract: The purpose of the paper is to provide a methodological framework for a critical analysis of a specific class of macroeconomic models, namely the dynamic stochastic general equilibrium models (DSGE). We suggest some epistemological reflections to explore the underlying methodology and history of the DSGE models. To do this, we decided to rely on a literature review on the contributions about the notion of model and modelling in philosophy, history and sociology of sciences. Our approach tries to define, in an interdisciplinary way, a consistent methodology for dealing with a specific object. The review of this large literature has been organized around two complementary definitions of the object (“model” as concept, for the philosophy and history of sciences and “modelling” as a scientific practice, for the sociology of science) and around three fundamental questions (what is a model? how to build a model? what is the purpose of a model?). Starting from this review, we discuss the main elements which are consistent with an analysis of DSGE models, focusing in particular on intra- and interdisciplinary interactions, on the mechanisms of policy expertise and on the mediation between theories and data.
    Keywords: Macroeconomic models, DSGE, modelling, new neoclassical synthesis, epistemology of economics.
    JEL: B41 B22
    Date: 2014–09
  8. By: S. Mohammad R. Davoodalhosseini
    Abstract: I characterize the constrained efficient (or planner's) allocation in a directed (competitive) search model with private information. There are sellers with private information on one side of the market and homogeneous buyers on the other side. They match bilaterally in different submarkets and trade. In each submarket, there are search frictions. In the market economy, homogeneous buyers enter different submarkets (i.e., post different contracts) and sellers with private information direct their search toward their preferred submarket. I define a planner whose objective is to maximize social welfare subject to the information and matching frictions of the environment. The planner can impose taxes and subsidies on agents that vary across submarkets while being subject to an overall budget-balance condition. I show that the planner generally achieves strictly higher welfare than the market economy. I also derive conditions under which the planner achieves the complete information allocation. I present examples in the context of financial and labor markets, explicitly solve for the efficient tax and transfer schemes and compare the planner's allocation with the equilibrium allocation.
    JEL: D8 E24 G1 J31 J64
    Date: 2014–11–30
  9. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxation over the business cycle for households di¤erentiated by labour skill, income and wealth. A model incorporating capital-skill complementarity in production and di¤erential access to labour and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We …rst …nd that, under a fully ‡exible budget, the income taxation burden over the business cycle is spread roughly equally across the high-, middle- and low-income households. However, under a balanced budget restriction, the burden is distributed least favourably to the middle-income and most favourably to the high income households.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
  10. By: Etienne Lalé
    Abstract: We study the effects of job-security provisions through the lens of a search-matching model with risk-neutral employers, risk-averse workers and incomplete asset markets. This setting limits the ability of agents to reallocate payments over time, and thereby to undo any mandatory transfer between them – a neutrality result known as the ’bonding critique’. We quantify the importance of this mechanism under common parameter values and find that mandatory transfers from the employer to the employee can have large negative effects on labor market equilibrium. Our findings show that the neutrality result with respect to job-security provisions breaks down in a model where there is scope for employment protection.
    Keywords: Job-Security Provisions, Incomplete Markets, Search and Matching, Bonding Critique.
    JEL: D52 J31 J63 J65
    Date: 2014–11
  11. By: Shengxing Zhang (New York University)
    Abstract: I build a dynamic model of the shadow banking system that intermediates funds through the interbank repo market to understand its efficiency and stability. The model emphasizes a key friction: the maturity mismatch between the short-term repo and the long-term investment that banks need to finance. The haircut, interest rate, default rate of the repo contract and liquidity hoarding of banks are all determined endogenously in the equilibrium with repo rollover. And default is contagious. When collateral risk increases unexpectedly, the haircut and interest rate overshoot, triggering massive initial default and persistently hiking default rate and depressed investment.
    Date: 2014
  12. By: Dai, Li; Minford, Patrick; Zhou, Peng
    Abstract: We use available methods for testing macro models to evaluate a model of China over the period from Deng Xiaoping's reforms up until the crisis period. Bayesian ranking methods are heavily influenced by controversial priors on the degree of price/wage rigidity. When the overall models are tested by Likelihood or Indirect Inference methods, the New Keynesian model is rejected in favour of one with a fair-sized competitive product market sector. This model behaves quite a lot more 'flexibly' than the New Keynesian.
    Keywords: Bayesian Inference; China; DSGE; Indirect Inference
    JEL: C11 C15 C18 E27
    Date: 2014–11
  13. By: Rodolfo Cermeño (Division of Economics, CIDE); Julio Mamani-Palacios
    Abstract: This paper evaluates empirically the volatility of real exchange rate in Peru under two regimes of monetary policy: the Monetary Targeting Regime, MTR, (1995:11–2001:12) and the Inflation Targeting Regime, ITR, (2002:01–2012:12). We estimate a small-scale macroeconomic model along the lines of the Dynamic Stochastic General Equilibrium (DSGE) models, under a New-Keynesian approach. We find strong evidence that volatility of real exchange rate differs substantially across regimes which is consistent with the theoretical results of Gali y Monacelli (2005) and also with the empirical results of Lastrapes (1989). Specifically, we find that the transition from the MTR to ITR has been accompanied by a substantial reduction of real Exchange rate volatility.
    Keywords: volatility, real Exchange rate, monetary policy in Peru, monetary regimes, DSGE models
    JEL: E52 E58
    Date: 2013–10
  14. By: Hoffmann, Mathias; Krause, Michael; Tillmann, Peter
    Abstract: This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. To explain this finding we provide a theoretical mechanism within a stochastic real business cycle growth model in which higher uncertainty of the income stream increases the precautionary savings motive of households. They have a desire to save more when the variance of their expected income stream is higher. We show that in the model the combination of income risk and a precautionary savings motive will lead to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.
    Keywords: capital flows,net foreign assets,productivity growth,uncertainty,precautionary savings
    JEL: F32 F36 F43 F44
    Date: 2014
  15. By: Boeri, Tito; Garibaldi, Pietro; Moen, Espen R
    Abstract: The Great Recession has indicated that firms' leverage and access to finance are important for hiring and firing decisions. It is now empirically established that bank lending is correlated to employment losses when credit conditions deteriorate. We provide further evidence of this drawing on a new dataset that we assembled on employment adjustment and financial positions of European firms. Yet, in the Diamond Mortensen Pissarides (DMP) model there is no role for finance. All projects that display positive net present values are realized and financial markets are assumed to be perfect. What if financial markets are not perfect? Does a different access to finance influence the firm's hiring and firing decisions? The paper uses the concept of limited pledgeability proposed by Holmstrom and Tirole to integrate financial imperfections and labor market imperfections. A negative shock wipes out the firm's physical capital and leads to job destruction unless internal cash was accumulated by firms. If firms hold liquid assets they may thus protect their em search capital, defined as the cost of attracting and hiring workers. The paper explores the trade off between size and precautionary cash holdings in both partial and general equilibrium. We find that if labor market frictions disappear, so does the motive for firms to hold liquidity. This suggests a fundamental complementarity between labor market frictions and holding of liquid assets by firms.
    Keywords: labor and finance; leverage; Pledgeability
    JEL: G01 J64
    Date: 2014–11
  16. By: Charles Olivier Mao Takongmo
    Abstract: What is the size of the government-spending multiplier in an open economy when the Zero Lower Bound (ZLB) on the nominal interest rate is binding? Using a theoretical framework, in a closed economy, Christiano, Eichenbaum, and Rebelo (2011), show that, when the nominal interest rate is binding, the government-spending multiplier can be close to four. Their theory helps us to understand the government spending multiplier in ZLB, but it is difficult to match that theory with the data. We propose a dynamic stochastic general equilibrium in open macroeconomics, with market imperfections, wage and price rigidities and endogenous smoothing monetary policy. We argue that, in a closed economy and in the presence of ZLB, there is no crowding out effect through interest rates. We also argue that in an open economy, there is another channel for the crowding out effect via the real exchange rate. For an open economy, the multiplier falls to the levels usually observed in small, closed economies for which the ZLB is not binding. <P>
    Keywords: Government-spending multiplier, zero lower bound, sticky price, sticky wages, Taylor rule,
    JEL: E52 E62 F41 F44
    Date: 2014–11–01
  17. By: Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
    Abstract: This paper examines whether efficiency considerations require that optimal labour income taxation is progressive or regressive in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation in the steady-state as well as along the transition path from the exogenous to optimal policy steady-state. We find that these results are explained by a lower labour supply elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.
    Keywords: optimal progressive taxation, skill premium, allocative efficiency,
    Date: 2014
  18. By: Devereux, Michael B; Yu, Changhua
    Abstract: International financial integration helps to diversify risk but also may increase the transmission of crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with endogenous portfolio choice and collateral constraints. Collateral constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. The analysis allows for different degrees of financial integration, moving from financial autarky to bond market integration and equity market integration. Financial integration leads to a significant increase in global leverage, doubles the probability of balance sheet crises for any one country, and dramatically increases the degree of `contagion' across countries. Outside of crises, the impact of financial integration on macro aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Financial integration can raise or lower welfare, depending on the scale of macroeconomic risk. In particular, in a low risk environment, the increased leverage resulting from financial integration can reduce welfare of investors.
    Keywords: financial contagion; international financial integration; leverage; occasionally binding contracts
    JEL: D52 F36 F44 G11 G15
    Date: 2014–10
  19. By: Minford, Patrick; Xu, Yongdeng; Zhou, Peng
    Abstract: Out-of-sample forecasting tests of DSGE models against time-series benchmarks such as an unrestricted VAR are increasingly used to check a) the specification b) the forecasting capacity of these models. We carry out a Monte Carlo experiment on a widely-used DSGE model to investigate the power of these tests. We find that in specification testing they have weak power relative to an in-sample indirect inference test; this implies that a DSGE model may be badly mis-specified and still improve forecasts from an unrestricted VAR. In testing forecasting capacity they also have quite weak power, particularly on the lefthand tail. By contrast a model that passes an indirect inference test of specification will almost definitely also improve on VAR forecasts.
    Keywords: DSGE; forecast performance; indirect inference; out of sample forecasts; specification tests; VAR
    JEL: E10 E17
    Date: 2014–11
  20. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Mei Hsu (College of Management, National Taiwan Normal University); Chih-Fang Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Labor supply in Europe was declined by about 30% relative to the US over the past 3 decades. The decline comes from hours per worker and employment. This paper studies a matching model and the effects of labor taxes and unemployment benefits. Labor taxes decrease hours and employment, with overstated adverse effects on hours if extensive margins are not considered. Unemployment benefits decrease employment and increase hours, with understated adverse effects on employment if intensive margins are not considered. In baseline, labor taxes and unemployment benefits together explain about 75% of declining labor supply in Europe relative to the US.
    Keywords: search, labor taxes, adverse labor markets, hours worked per worker and employment
    JEL: E24 E60
    Date: 2014–11
  21. By: Mitsuru Katagiri (Bank of Japan); Hideki Konishi (School of Political Science and Economics, Waseda University); Kozo Ueda (School of Political Science and Economics, Waseda University)
    Abstract: Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
    Keywords: Deflation, Fiscal theory of the price level; Politico-economic equilibrium
    JEL: D72 E30 E62 E63 H60
    Date: 2014–11
  22. By: Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (Graduate School of Economics, Osaka University)
    Abstract: An overlapping generations model with the double infinity of commodities and agents is the most fundamental framework to introduce outside money into a static economic model. In this model, competitive equilibria may not necessarily be Pareto-optimal. Although Samuelson (1958) emphasized the role of fiat money as a certain kind of social contract, we cannot characterize it as a cooperative game-theoretic solution like a core. In this paper, we obtained a finite replica core characterization of monetary equilibria. Preferences are not necessarily assumed to be ordered.
    Keywords: Monetary Equilibrium, Overlapping Generations Model, Core Equivalence, Replica Econ-omy, Non-Orderd Preference
    JEL: C71 D51 E00
    Date: 2014–11
  23. By: Mewael F. Tesfaselassie
    Abstract: The standard search model of unemployment predicts, under plausible assumptions about household preferences, that disembodied technological progress leads to higher unemployment. This prediction is at odds with the experience of industrialized countries in the 1970s. This paper shows that augmenting the model with nominal price rigidity goes towards reconciling the model's prediction. In the presence of nominal price rigidity faster growth is shown to lead to lower unemployment if the rate of inflation is relatively high, as was the case in the 1970s. In general, the effect of growth on unemployment is shown to be non-monotonic. There is a threshold level of inflation below (above) which faster growth leads to higher (lower) unemployment
    Keywords: growth, trend inflation, unemployment
    JEL: E24 E31
    Date: 2014–11
  24. By: Manolis Galenianos (Royal Holloway, University of London); Alessandro Gavazza (London School of Economics)
    Abstract: We develop a theoretical framework to study illicit drugs markets, and we estimate it using data on drug purchases. Buyers are searching for high-quality drugs, but they can determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip-off first-time buyers, or can offer higher-quality drugs to induce buyers to purchase again from them. In equilibrium, a distribution of qualities persists. The estimated model implies that increasing penalties may increase the purity and the affordability of drugs traded, because it increases sellers' relative profitability of targeting loyal buyers versus first-time buyers.
    Date: 2014
  25. By: Gaffeo, Edoardo; Petrella, Ivan; Pfajfar, Damjan; Santoro, Emiliano
    Abstract: There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households’ utility depends on consumption deviations from a reference level below which loss aversion is displayed. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation. Contractions face the Central Bank with higher responsiveness of output to interest rate changes, as well as a flatter aggregate supply schedule.
    Keywords: asymmetry; business cycle; monetary policy; prospect theory
    JEL: D03 D11 E32 E42 E52
    Date: 2014–08
  26. By: Rodrigo Ceni (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: This paper analyzes how the informality responds to the quality of the labor enforcement and the bundle of benefits that the formal workers receive in different countries of Latin America. Countries with different levels of informality were compared, highlighting the features that could induce these different levels. In a general equilibrium framework, the government chooses a level of government enforcement and a bundle of benefits maximizing the workers’ utility subject to a budget constraint, a representative firm chooses the share of workers in formality and informality that they want to hire, and the workers offer a share of time in formality and informality. I estimate the main parameters of the model, the production function, the quality of government enforcement and the quality of benefits, for five countries: Argentina, Brazil, Colombia, Peru and Uruguay. Differences in the quality functions of the government enforcement and benefits are found, as well as in the fines established to enforce the agents.
    Keywords: Informality, labor regulation, enforcement, Latin America
    JEL: E26 H26 H53 O17 O54
    Date: 2014–12

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