nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2011‒07‒21
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Regulation, enforcement and informality: an analysis based on selected countries By Roychowdhury, Punarjit
  2. Who Benefits from Reducing the Cost of Formality? Quantile Regression Discontinuity Analysis By Tommaso Gabrieli; Antonio F. Galvao, Jr.; Antonio F. Galvao, Jr.
  3. Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes By Eduardo Zilberman
  4. Self-employment of rural-to-urban migrants in China By Giulietti, Corrado; Ning, Guangjie; Zimmermann, Klaus F

  1. By: Roychowdhury, Punarjit
    Abstract: It is claimed that introducing flexibility in regulation is a sufficient condition for curbing the level of informality in the developing world. This dissertation tries to test the validity of this claim using data for 46 countries over the time period 1980-2008 to explore the dynamics between regulation and informal employment. The empirical findings obtained using Panel Data regression point out that regulation does not significantly affect informality. What matters is the interaction between governance and regulation. Thus, it is established that the quality of governance and the institutions enforcing the regulation are more important in context of curbing the level of informality. In addition, the dissertation also tries to find out the most important instruments of regulation that a state can put to use in context of informality.
    Keywords: Informality; Regulation; Enforcement; Governance; Panel Data
    JEL: J08 L51 O17 J01 C40 L50 C33 L00
    Date: 2011–06–15
  2. By: Tommaso Gabrieli (School of Real Estate & Planning, Henley Business School, University of Reading); Antonio F. Galvao, Jr. (University of Iowa); Antonio F. Galvao, Jr. (City University London)
    Abstract: This paper studies the effects of increasing formality via tax reduction and simplification schemes on micro-firm performance. It uses the 1997 Brazilian SIMPLES program. We develop a simple theoretical model to show that SIMPLES has an impact only on a segment of the micro-firm population, for which the effect of formality on firm performance can be identified, and that can be analyzed along the single dimensional quantiles of the conditional firm revenues. To estimate the effect of formality, we use an econometric approach that compares eligible and non-eligible firms, born before and after SIMPLES in a local interval about the introduction of SIMPLES. We use an estimator that combines both quantile regression and the regression discontinuity identification strategy. The empirical results corroborate the positive effect of formality on microfirms' performance and produce a clear characterization of who benefits from these programs.
    Keywords: Formality, Micro-firms, Quantile regression, Regression discontinuity
    JEL: J23 L25
    Date: 2010–10
  3. By: Eduardo Zilberman (Department of Economics PUC-Rio)
    Abstract: I investigate the optimal auditing scheme for a revenue-maximizing tax-collection agency that observes not only reported prots, but also the level of employment at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and non-monotone in ability. In intermediate audit costs, less-productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. I argue that if the optimal auditing scheme were adopted in practice, net revenue collected from nonfarm sole proprietors would increase by at least 59 percent.
    Date: 2011–07
  4. By: Giulietti, Corrado; Ning, Guangjie; Zimmermann, Klaus F
    Abstract: This paper focuses on the determinants of self-employment among rural to urban migrants in China. Two self-selection mechanisms are analysed: the first relates to the manner in which migrants choose self-employment or paid work based on the potential gains from either type of employment; the second takes into account that the determinants of the migration decision can be correlated with employment choices. Using data from the 2008 Rural-Urban Migration in China and Indonesia (RUMiCI) survey, a selection model with endogenous switching is estimated. Earnings estimates are then used to derive the wage differential, which in turn is used to model the employment choice. The procedure is extended to account for migration selectivity and to compare individuals with different migration background and employment histories. The results indicate that self-employed individuals are positively selected with respect to their unobserved characteristics. Furthermore, the wage differential is found to be an important driver of the self-employment choice.
    Keywords: European Union; rural to urban migration; selection bias magnets; self-employment; wages
    JEL: J23 J61 O15
    Date: 2011–07

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