nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2011‒09‒22
eleven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Endogenous Norm Formation Over the Life Cycle – The Case of Tax Evasion By Nordblom, Katarina; Zamac, Jovan
  2. Optimal auditing and insurance in a dynamic model of tax compliance By B. Ravikumar; Yuzhe Zhang
  3. Gravity Models of Trade-based Money Laundering By Joras Ferwerda; Mark Kattenberg; Han-Hsin Chang; Brigitte Unger; Loek Groot; Jacob A. Bikker
  4. Is the Formal Sector too Large or too Small? A Reexamination of Minimum Wages in Developing Countries By Frédéric Gavrel, University of Caen Basse-Normandie, France - CREM-CNRS
  5. Revisiting the Apparent Paradox: Foreign Capital Inflow, Welfare Amelioration and ‘Jobless Growth’ with Agricultural Dualism and Non-traded Intermediate Input By Mukherjee, Soumyatanu
  6. Regímenes de desempeño económico y dualismo estructural en la dinámica de las entidades federativas de México, 1970 - 2006 By Juan Gabriel Brida; Juan Pereyra; Martín Puchet Anyul; Wiston Adrián Risso
  7. Using Personal Car Register for Measuring Economic Inequality in Countries with a Large Share of Shadow Economy: Evidence for Latvia By Vyacheslav Dombrovsky; Konstantin A. Kholodilin; Boriss Siliverstovs
  8. Formal Sector Price Discoveries: Results from a Developing Country By M. Ali Choudhary; Saima Naeem; Abdul Faheem; Nadim Haneef; Farooq Pasha
  9. Assessing the Distributive Impact of More than Doubling the Minimum Wage: The Case of Uruguay By Fernando Borraz; Nicolás Gonzalez Pampillón
  10. Assessing Redistribution in the Uruguayan Social Security System By Alvaro Forteza; Irene Mussio
  11. Labour Market Reforms in Japan to Improve Growth and Equity By Randall S. Jones; Satoshi Urasawa

  1. By: Nordblom, Katarina (Department of Economics); Zamac, Jovan (Department of Economics)
    Abstract: This paper offers an explanation to why the general observation that elderly hold stronger moral attitudes than young ones may be an age rather than a cohort effect. We apply mechanisms from social psychology to explain how personal norms may evolve over the life cycle. We assume that people update their norms influenced by their own past behavior (e.g., cognitive dissonance) and/or by the attitudes of their peers (normative conformity). We apply the theory on actual norm distributions for young and old concerning tax evasion. Allowing for heterogeneous updating of norms where only those who identify with their network are actually conforming with it, while the others are only influenced by their own past behavior, we can explain the difference between young and old people’s moral values as an age effect through endogenous norm formation.
    Keywords: Social norms; Endogenous norms; Tax evasion; Cognitive dissonance; Self-signaling; Normative conformity
    JEL: H26
    Date: 2011–06–30
  2. By: B. Ravikumar; Yuzhe Zhang
    Abstract: We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can underreport his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly and imperfect auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of low-income reports exceeds a threshold, then the auditing probability becomes positive. That is, the tax authority guarantees that the taxpayer will not be audited until the threshold duration is reached. We also find that auditing becomes less frequent if the auditing cost is higher or if the variance of income is lower.
    Keywords: Tax auditing ; Taxation
    Date: 2011
  3. By: Joras Ferwerda; Mark Kattenberg; Han-Hsin Chang; Brigitte Unger; Loek Groot; Jacob A. Bikker
    Abstract: Several attempts have been made in the economics literature to measure money laundering. However, the adequacy of these models is difficult to assess, as money laundering takes place secretly and, hence, goes unobserved. An exception is trade- based money laundering (TBML), a special form of trade abuse that has been discovered only recently. TBML refers to criminal proceeds that are transferred around the world using fake invoices that under- or overvalue imports and exports. This article is a first attempt to test well-known prototype models proposed by Walker and Unger to predict illicit money laundering flows and to apply traditional gravity models borrowed from international trade theory. To do so, we use a dataset of Zdanowicz of TBML flows from the US to 199 countries. Our test rejects the specifications of the Walker and Unger prototype models, at least for TBML. The traditional gravity model that we present here can indeed explain TBML flows worldwide in a plausible manner. An important determinant is licit trade, the mass in which TBML is hidden. Furthermore, our results suggest that criminals use TBML in order to escape the stricter anti money laundering regulations of financial markets.
    Keywords: Money laundering, international trade, gravity model, Walker model.
    JEL: C21 F10
    Date: 2011–09
  4. By: Frédéric Gavrel, University of Caen Basse-Normandie, France - CREM-CNRS
    Abstract: This paper reexamines the issue of the division of the labor force between the two sub-markets (formal and informal) of a developing economy. The formal sector is represented by a matching model with vertically differentiated workers. Assuming that firms hire their best applicants, we state that the formal sector is too small in terms of its labor force but too large in terms of job creation. Next we show that introducing a minimum wage increases the size of the formal sector with respect both to its labor force and to job creation. In accordance with the well-known paradox of Harris and Todaro, the enlargement of the formal market is accompanied by a rise in unemployment. However, when associated with a tax on job creation, the introduction of a minimum wage in the formal sector improves the efficiency of the labor market by making the formal sector more attractive to workers.
    Keywords: Formal and informal labor markets, applicant ranking, efficiency, minimum wage
    JEL: O17 J64 J68
    Date: 2011–07
  5. By: Mukherjee, Soumyatanu
    Abstract: In order to answer the pertinent question why developing countries are showing penchant for foreign capital over the last two decades in spite of its detrimental effects as revealed from the conventional two-sector mobile capital version of Harris–Todaro (HT) model in the presence of protectionist policy; this paper, in terms of a three-sector HT type general equilibrium model with agricultural dualism where advanced agricultural sector produces a non-traded intermediate input using capital apart from labour and land for the agro-based industry in the urban sector, tries to show that foreign capital inflow may not only improve social welfare, but also lower the magnitude of urban unemployment of labour or may render the phenomenon of ‘jobless growth’.
    Keywords: Foreign capital; Agricultural dualism; Non-traded intermediate input; Welfare; Urban unemployment; Jobless growth; Stolper-Samuelson theorem; General equilibrium model
    JEL: F16 O18 Q17 O13 J01 O33 J23
    Date: 2011–09–15
  6. By: Juan Gabriel Brida (Facultad de Economía de la Libre Universidad de Bolzano); Juan Pereyra (Colegio de México); Martín Puchet Anyul (Facultad de Economía de la UNAM); Wiston Adrián Risso (Facultad de Economía de la Libre Universidad de Bolzano)
    Abstract: This paper describes the dynamics of the economic performance of the sub-national Mexican states from 1970 to 2006; the used state variables are the levels and the growth rates of the GDP per capita. The authors situate his approach in a conceptual and methodological panorama of the existent literature. Starting by the regime concept, the paper introduces a distance notion for to compare the observed paths and the clustering of the economies whose evolution is studied. The analysis shows that have existed two fundamental clusters: one of high and another of low performance, in addition of other transitory groups. In the cluster of high performance increases the number of members while in the cluster of low performance diminishes; at the same time, the article shows that the sub-national states that belong to the first cluster have had performances each time more similar. Also it confirms that the subnational states move starting from the cluster of low performance to arrive to the cluster of high performance and that the distance between both clusters has increased. These facts are interpreted basing in the concept of dual economy proposed by the development theory.
    Keywords: economic performance; economic regime; convergence; cluster; development
    JEL: O40 O47 C82
    Date: 2011–07
  7. By: Vyacheslav Dombrovsky; Konstantin A. Kholodilin; Boriss Siliverstovs
    Abstract: We suggest to use information from the state register of personal cars as an alternative indicator of economic inequality in countries with a large share of shadow economy. We illustrate our approach using the Latvian pool of personal cars. Our main finding is that the extent of household economic inequality in Latvia is much larger than officially assumed. The latest officially available estimate of the Gini coefficient is 0.36 for 2005, which is much lower than 0.55 for 2009 reported in our paper.
    Keywords: Economic inequality, cars, social signaling, Gini index, Latvia
    JEL: D31 E26 Z13
    Date: 2011
  8. By: M. Ali Choudhary (University of Surrey and State Bank of Pakistan); Saima Naeem (State Bank of Pakistan); Abdul Faheem (State Bank of Pakistan); Nadim Haneef (State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan)
    Abstract: We present results of 1189 structured interviews about price-setting behavior of firms in the manufacturing and services sector in Pakistan. Our discoveries are that frequency of price change is considerably high, lowering the real impact of monetary policy. The remaining price stickiness is explained by firms caring about relative prices and the persistence of shocks. The exchange-rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these pass-through to the economy. Firms with connections with the informal sector, especially through demand, have a lower probability of price adjustment.
    JEL: E32 E52 O11
    Date: 2011–09
  9. By: Fernando Borraz (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Nicolás Gonzalez Pampillón (Universidad de Montevideo)
    Abstract: This paper analyzes the role of the sharply increases in the minimum wage after 2004 in Uruguay in the slight decrease on wage inequality. We Önd no impact of the miminum wage increases on wage inequality. This results can be explained by the low starting level of the minimum wage or lack of compliance with it. The Uruguayan experience shows that the minimum wage is not always e§ective as a redistribution instrument.
    Keywords: minimum wage, wage inequality, IV, semiparametric estimation
    JEL: J20 J31 J38
    Date: 2011–08
  10. By: Alvaro Forteza (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Irene Mussio (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: We assess redistribution in the Uruguayan main pension and unemployment insurance programs on a lifetime basis. Using administrative records from social security, we simulate lifetime declared labor income and flows of contributions and benefits of affiliates to the programs. Expected present values of income and net flows are also computed. Equipped with these estimations we construct standard measures of distribution and redistribution of lifetime labor income through the social security system. Our findings suggest that these programs reduce income inequality. In particular, social Security reduces the Gini coefficient of expected lifetime formal labor income by almost 2 percentage points.
    Keywords: Redistribution; Social Security; Uruguay
    JEL: H55 J14 J2
    Date: 2011–08
  11. By: Randall S. Jones; Satoshi Urasawa
    Abstract: Traditional Japanese labour market practices, which benefited both workers and firms during the highgrowth era, are no longer appropriate in the context of slow economic growth and rapid population ageing. Reforms are needed in light of the upward trend in non-regular employment to break down labour market dualism and to encourage greater labour force participation by women, the elderly and youth. A comprehensive approach that includes improving the social insurance coverage of non-regular workers and upgrading training programmes for them, preventing discrimination against non-regular workers and reducing effective employment protection for regular workers would increase labour market flexibility and human capital. Moreover, such reforms would increase equity across different segments of the labour force. Drawing more women into the labour force requires removing financial disincentives to work, creating more family-friendly workplaces and increasing the availability of childcare. The labour force participation of the elderly should be raised by promoting continuous employment and abolishing mandatory retirement. More effective vocational training is needed for younger workers. This Working Paper relates to the 2011 OECD Economic Survey of Japan (<P>Réformer le marché du travail au Japon pour stimuler la croissance et améliorer l'équité<BR>Les pratiques traditionnellement suivies au Japon sur le marché du travail, bénéfiques aussi bien aux travailleurs qu’aux entreprises en période de forte croissance, ne sont plus de mise dans un contexte de ralentissement de la croissance économique et de vieillissement rapide de la population. Au vu de la tendance à la hausse de l’emploi non régulier, des réformes sont nécessaires pour mettre fin au dualisme du marché du travail et encourager une participation plus intense des femmes, des travailleurs âgés et des jeunes à la vie active. Une démarche globale incluant une amélioration de la couverture sociale et une augmentation des programmes de formation professionnelle pour les travailleurs non réguliers, une exclusion des discriminations contre eux et réduisant la protection de l’emploi dont bénéficient les travailleurs réguliers permettrait de renforcer la flexibilité du marché du travail et d’accroître le capital humain. Les réformes devraient en outre contribuer à améliorer l’équité entre les différents segments de la population active. Pour attirer davantage les femmes vers la vie active, il convient d’éliminer les mécanismes financiers qui jouent contre le travail, en créant des emplois plus conciliables avec la vie de famille et en développant les services de garde d’enfants. L’intégration des plus âgés sur le marché du travail doit être renforcée en favorisant leur maintien en activité et en supprimant l’âge de départ obligatoire à la retraite. Il faut également offrir aux jeunes une formation professionnelle plus efficace. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Japon, 2011 (
    Keywords: Japan, dualism, employment protection, labour force participation rates, female employment, vocational training, non-regular workers, part-time workers, older workers, work-life balance, labour market, fertility rate, Japanese economy, dispatched workers, fixed-term contracts, Japon, marché du travail, travailleurs âgés, dualisme, protection de l'emploi, travailleurs non réguliers, formation professionnelle, travailleurs à temps partiel, activité des femmes, taux de fécondité, équilibre entre travail et vie familiale, économie japonaise, travailleurs intérimaires, contrats à durée déterminée
    JEL: J11 J3 J5 J7
    Date: 2011–09–06

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