nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒01‒03
23 papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax morale and compliance : review of evidence and case studies for Europe By Torgler, Benno
  2. Tax morale, eastern Europe and European enlargement By Torgler, Benno
  3. Optimal tax enforcement under prospect theory By Gwenola Trotin; Amedeo Piolatto
  4. Undeclared economic activity in central and eastern Europe -- how taxes contribute and how countries respond to the problem By Leibfritz, Willi
  5. Income tax evasion dynamics: Evidence from an agent-based econophysics model By Pickhardt, Michael; Seibold, Goetz
  6. The elasticity of taxable income of high earners: Evidence from Hungary By Áron Kiss; Pálma Mosberger
  7. What explains prevalence of informal employment in European countries : the role of labor institutions, governance, immigrants, and growth By Hazans, Mihails
  8. Labor institutions and their impact on shadow economies in Europe By Fialova, Kamila; Schneider, Ondrej
  9. The effect of taxation on informal employment: evidence from the Russian flat tax reform By Slonimczyk, Fabian
  10. Coordinating tax reforms in the poorest countries : can lost tariffs be recouped ? By Wagle, Swarnim
  11. What drives cash demand? Transactional and residual cash demand in selected countries By Sisak Balázs
  12. An attempt to measure the trends in shadow employment in Poland By Walewski, Mateusz
  13. Informal workers across Europe : evidence from 30 European countries By Hazans, Mihails
  14. Migration as a Substitute for Informal Activities: Evidence from Tajikistan By Ilhom Abdulloev; Ira N. Gang; John Landon-Lane
  15. Informalidad, productividad y crecimiento: Propuesta metodológica basada en censos industriales By Daniel Artana; Sebastián Auguste
  16. The Evolution of Gender and Racial Occupational Segregation across Formal and non-Formal Labour Markets in Brazil – 1987 to 2006 By Paola Salardi
  17. Funding Self-Employment: The Role of Consumer Credit By Christoph Kneiding; Alexander S. Kritikos
  18. Vertical linkage between formal and informal credit markets: corruption and credit subsidy policy By Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
  19. The effect of mafia on public transfers By Guglielmo Barone; Gaia Narciso
  20. Counterproductive Counternarcotic Strategies? By Andersson, Camilla
  21. A segmented labor supply model estimation for the construction of a CGE microsimulation model: An application to the Philippines By Dorothée Boccanfuso; Luc Savard
  22. Martinique’s Informal Sector By Annie Motch; Gérard Forgeot
  23. Participation in Rotating Savings and Credit Associations in Indonesia: New Empirical Evidence on Social Capital By A. Lasagni; E. Lollo

  1. By: Torgler, Benno
    Abstract: This paper provides an overview of the literature on tax morale and tax compliance. Most of the material here is based on research that I have conducted together with my co-authors over the last 10 years. Europe has a dominant place in this paper. Sometimes results derived from other countries are discussed that could be relevant for Europe. The overall findings show the importance of accountability, democratic governance, efficient, and transparent legal structures and therefore trust within the society to enforce tax compliance and tax morale.
    Keywords: Taxation&Subsidies,Subnational Economic Development,Debt Markets,Emerging Markets,Tax Law
    Date: 2011–12–01
  2. By: Torgler, Benno
    Abstract: This study tries to remedy the current lack of tax compliance research analyzing tax morale in 10 Eastern European countries that joined the European Union in 2004 or 2007. By exploring tax morale differences between 1999 and 2008, it shows that tax morale has decreased in 7 out of 10 Eastern European countries. This lack of sustainability may support the incentive based conditionality hypothesis that the European Union only has a limited ability to influence tax morale over time. The author observes that events and processes at the country level are crucial to understanding tax morale. Factors such as perceived government quality and trust in the justice system and the government are positively correlated with tax morale in 2008.
    Keywords: Taxation&Subsidies,Debt Markets,Subnational Economic Development,Emerging Markets,National Governance
    Date: 2011–12–01
  3. By: Gwenola Trotin (EQUIPPE); Amedeo Piolatto (Universidad de Alicante)
    Abstract: Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.
    Keywords: Tax evasion; Income tax enforcement; Prospect theory
    JEL: D81 H26 K42
    Date: 2011–12
  4. By: Leibfritz, Willi
    Abstract: The paper examines the incentives and distortions created by tax policy and administration structures that motivate individuals to undeclare or under-declare work in the new EU member countries. It analyses the tax level and the tax structure"mix"of tax instruments, the special taxation regimes set up to attract workers and entrepreneurs back into the formal economy and how tax policies such as the introduction of a"flat tax"on income from labor and capital impacted workers and entrepreneurs in terms of formalizing work. It also attempts to gain some insight into the effectiveness of tax administration by comparing some input and output measures As non-tax factors can amplify the adverse effects of taxes on the labor market and reduce the effectiveness of tax reform, some of these other economic framework conditions are also discussed. This paper concludes by refining the main results and possible best practices for tackling undeclared work. The paper argues that the new EU member countries have had mixed success tackling undeclared work. While taxation matters, other underlying conditions for formal sector activity are also important. Addressing the problem of undeclared work therefore requires a broad policy approach with further improvements in tax policies, tax administration, and in general economic framework conditions for formal sector activity.
    Keywords: Taxation&Subsidies,Emerging Markets,Public Sector Economics,Debt Markets,Tax Law
    Date: 2011–12–01
  5. By: Pickhardt, Michael; Seibold, Goetz
    Abstract: We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. We then use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications. --
    Keywords: tax evasion,tax compliance,Ising Model,econophysics,numerical simulation
    JEL: H26 O17 C15
    Date: 2011
  6. By: Áron Kiss (Magyar Nemzeti Bank (central bank of Hungary)); Pálma Mosberger (Central European University)
    Abstract: The paper studies how high-income taxpayers responded to the introduction of the ‘extraordinary tax on individuals’ in Hungary in 2007. The study is based on a panel of tax returns compiled by the Hungarian Tax Authority for the purposes of this study, containing information on 10 percent of tax-filers from 2005 and three subsequent years. We estimate the elasticity of taxable income with respect to the marginal net-of-tax rate and find that the taxable income of Hungarian high earners is moderately responsive to taxation: the estimated elasticity is about 0.2. This means that if the upper tax rate of the 2010 Hungarian tax system were increased by a small amount, the behavioral response of taxpayers would reduce the additional tax revenue by about 60 percent. We find evidence suggesting that the elasticity is a reflection of a labor supply response to the tax change on the intensive margin, and not a reflection of tax shifting, avoidance or evasion.
    Keywords: taxable income elasticity, personal income tax, tax avoidance
    JEL: H20 H24 H31 J22
    Date: 2011
  7. By: Hazans, Mihails
    Abstract: This paper looks into institutional and other macro determinants of prevalence of informal dependent employment, as well as informal self-employment, in European countries, using European Social Survey data on work without legal contract in on 30 countries, covering years 2004-2009. Consistently with theoretical predictions, quality of business environment has a significant negative impact on prevalence of both types of informal employment. The share of non-contracted employees is negatively affected by perceived quality of public services and positively related to economic growth. Informal self-employment is positively related to growth in Europe at large, as well as in Eastern and Southern Europe. The level of GDP per capita also has a positive impact on the prevalence of informal employment in Europe at large and within Eastern and Southern Europe, whilst an opposite effect is found in Western and Northern Europe. Other things equal, the share of non-contracted employees in the labor force across European countries increases with the minimum-to-average wage ratio, with union density, with the share of first and second generation immigrants, and with income inequality, but falls with stricter employment protection legislation (EPL) and higher tax wedge on labor. Thus it appears that in Europe at large, labor cost effects of EPL and taxes are weaker than their impact via perceptions of job security and law enforcement, along with tax morale and the income effect. Yet the EPL effect on informality is positive (i.e., cost-related) when either Eastern and Southern Europe or Western and Northern Europe are considered separately. Furthermore, within Western and Northern Europe, the minimum wage effect is negative, whilst within Eastern and Southern Europe, the union effect is negative; in both cases, we offer a supply side explanation.
    Keywords: Labor Markets,Labor Policies,Debt Markets,Economic Theory&Research,Markets and Market Access
    Date: 2011–12–01
  8. By: Fialova, Kamila; Schneider, Ondrej
    Abstract: This paper analyzes the role of labor market institutions in explaining the development of shadow economies in European countries. The analysis uses several alternative measures of the shadow sector, and examines the effects of labor institutions on the shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the past decade. Although the share of the shadow economy in gross domestic product averaged 27.5 percent in the new member countries in 1999-2007, the respective share in the old member states stood at 17.9 percent. The paper estimates the effects of labor market institutions on two sets of shadow economy indicators -- shadow production and shadow employment. Comparing alternative measures of the shadow sector allows a more granulated analysis of labor market institution effects. The results indicate that the one institution that unambiguously increases shadow economy production and employment is the strictness of employment protection legislation. Other labor market institutions -- active and passive labor market policies, labor taxation, trade union density, and the minimum wage setting -- have less straightforward and statistically robust effects and their impacts often diverge in new and old European Union member countries. The differences are not robust enough, however, to allow for rejecting the hypothesis of similar effects of labor market institutions in new and old European Union member states.
    Keywords: Labor Markets,Environmental Economics&Policies,Labor Policies,Economic Theory&Research,Debt Markets
    Date: 2011–12–01
  9. By: Slonimczyk, Fabian
    Abstract: The 2001 Russian tax reform reduced average tax rates for the personal income tax and the payroll or social tax. It also made the tax structure more regressive. Because individuals in the lower income bracket were for the most part not affected, it is possible to estimate the effects of the reform using a differences-in-differences approach. I study the effect of the reform on informal employment. Informality is defined using information on employment registration and self-employment. Applying parametric and semi-parametric techniques, I find evidence that the tax reform led to a significant reduction in the fraction of informal employees. Among the different forms of informality I study, the reform seems to have had the strongest effect on the prevalence of informal irregular activities. I also document stronger effects on individuals who benefited from the largest reductions in tax rates.
    Keywords: informal sector; entrepreneurship; tax reform; difference-in-difference; transition; Russia
    JEL: O17 J3 P2 H24
    Date: 2011
  10. By: Wagle, Swarnim
    Abstract: A revenue-neutral switch from trade taxes to domestic consumption taxes is fraught with implementation challenges in countries with a large informal sector. It is shown for a sample of low-income countries over 25 years that they have had a mixed record of offsetting reductions in trade tax revenue. The paper then analyzes the specific case of Nepal, using a unique data set compiled from unpublished customs records of imports, tariffs and all other taxes levied at the border. It estimates changes to revenue and domestic production associated with two sets of reforms: i) proportional tariff cuts coordinated with a strictly enforced value-added tax; and ii) proposed tariff cuts under a regional free trade agreement. It is shown that a revenue-neutral tax reform is conditional on the effectiveness with which domestic taxes are enforced. Furthermore, loss of revenue as a result of intra-regional free trade can be minimized through judicious use of Sensitive Lists that still cover substantially all the trade as required by Article XXIV of the GATT.
    Keywords: Debt Markets,Trade Policy,Economic Theory&Research,Free Trade,International Trade and Trade Rules
    Date: 2011–12–01
  11. By: Sisak Balázs (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: The goal of this study is to determine the reasons behind high cash demand in several Central European countries, especially Hungary. We distinguish between legal and illegal cash demand in an attempt to model the former. In our approach, legal cash demand can be explained by transactional and saving motives (hoarding). We apply both direct calculation and an econometric approach in order to isolate transactional demand. Regarding the econometric approach, a number of different models are estimated to eliminate, as far as possible, endogeneity bias. We examine transactional and residual cash stock (legal hoarding and illegal cash demand) of several Central European and Western countries that have their own currency (did not introduce euro). We find that transactional cash demand is strongly influenced by the level of improvement of the payment system. There are explicit signs that interest rates negatively influence nontransactional cash demand. However, we find examples where this is not the case. In these instances, the increase of non-transactional cash demand may be caused by illegal cash demand.
    Keywords: cash demand, shadow economy, payment system, panel econometrics
    JEL: E26 E41 E42 C23
    Date: 2011
  12. By: Walewski, Mateusz
    Abstract: This paper presents the results of an attempt to use the combined results of the dedicated survey performed by CASE in 2007 and Polish LFS data in order to: (a) analyze the development of the shadow employment in Poland in years 2003-2008 and, (b) analyze the transition probabilities in and out of shadow employment. The estimated share of shadow workers in total employment in Poland in years 2003-2008 was increasing until 2006 and then started to decrease in the years 2007 and 2008. Other results are in line with one of the main conclusions of the CASE study from 2007 suggesting that shadow employment is more a way of coping with lack of other employment opportunities than an equivalent or even superior alternative to any legal employment contracts. On the other hand those who enter shadow employment are more active part of the group having problems with finding full time/open term employment. They are much more inclined to cope with their situation by entering some form of self-employment than to stay passive and depend on social assistance.
    Keywords: Labor Markets,Labor Policies,Labor Standards,Work&Working Conditions,Labor Management and Relations
    Date: 2011–12–01
  13. By: Hazans, Mihails
    Abstract: The European Social Survey data are used to analyze informal employment in 30 countries, focusing on employees without contracts and on informal self-employed workers (who are distinguished from formal workers). Overall the size of informal employment decreases from South to West to East to North. However, working without a contract is more prevalent in Eastern Europe than in the West, except for Ireland, the United Kingdom, and Austria. Between 2004 and 2009, no cases were found when unemployment and dependent informality rates in a country went up together, suggesting that working without a contract is pro-cyclical in Europe. The dependent informality rate is inversely related to skills (measured by either schooling or occupation). Both in Southern and in Western Europe, the highest dependent informality rate is found among immigrants from Central and Eastern Europe and the Former Soviet Union, while in Eastern Europe this group is second after minorities without immigrant background. In the Southern and part of Western Europe, immigrants not covered by European Union free mobility provisions are much more likely to work without a contract than otherwise similar natives. The paper provides evidence that exclusion and discrimination plays an important role in pushing employees into informality, while this seems not to be the case for informal self-employed workers. Both on average and after controlling for a rich set of individual characteristics, informal employees in all parts of Europe are having the largest financial difficulties among all categories of the employed population (yet they fare much better than the unemployed and discouraged), while informal self-employed workers are at least as well off as formal employees. Finally, there is a negative and significant effect of individual-level satisfaction with the national government on the propensity to work without a contract in Eastern Europe, as well as in Western Europe.
    Keywords: Labor Markets,Work&Working Conditions,Labor Policies,Labor Management and Relations,Tertiary Education
    Date: 2011–12–01
  14. By: Ilhom Abdulloev (Rutgers University); Ira N. Gang (Rutgers University & Fellow of IZA, OEI, CReaM); John Landon-Lane (Rutgers University)
    Abstract: How is migration related to informal activities? They may be complementary since new migrants may have difficulty finding employment in formal work, so many of them end up informally employed. Alternatively, migration and informality may be substitutes since migrants' incomes in their new locations and income earned in the home informal economy (without migration) are an imperfect trade-off. Tajikistan possesses both a very large informal sector and extensive international emigration. Using the gap between household expenditure and income as an indicator of informal activity, we find negative significant correlations between informal activities and migration: the gap between expenditure and income falls in the presence of migration. Furthermore, Tajikistan's professional workers ability to engage in informal activities enables them to forgo migration, while low-skilled non-professionals without post-secondary education choose to migrate instead of working in the informal sector. Our empirical evidence suggests migration and informality substitute for one another.
    Keywords: informal, migration, remittances, Tajikistan
    JEL: O17 J61 P23
    Date: 2011–12
  15. By: Daniel Artana; Sebastián Auguste
    Abstract: El presente trabajo presenta un enfoque metodológico que permite medir a nivel de planta y de sectores la informalidad y la productividad en forma conjunta de manera tal de poder entender mejor y probar las distintas hipótesis sobre la relación entre ambas variables. Se destaca que la decisión de ser formal o informal en general no es dicotómica, sino que es un matiz, y se decide en qué grado se cumple con las reglas. De todas las reglas que se deberían cumplir para ser formal se pone énfasis en la informalidad impositiva. Se destaca que debido a la tecnología de evasión y de monitoreo de las agencias tributarias, distintas firmas pueden evadir en forma diferente en cada impuesto. Así, se requiere contar con una medida global de informalidad impositiva en lugar de una medida de informalidad laboral, que ha sido lo más usual. La metodología se desarrolla teniendo en cuenta el uso de Censos Industriales. Los estudios económicos utilizan estos Censos cada vez más para medir y analizar la productividad, pero en general no han sido utilizados para medir informalidad. La metodología propuesta es una aproximación útil para entender la relación entre informalidad y productividad.
    Keywords: Economía :: Productividad, Sector privado :: PYME, Economía :: Política industrial, Economía :: Política fiscal, Economía :: Desarrollo y crecimiento económicos, Informalidad, productividad, Pymes, pequeñas y medianas industrias, censo industrial, sector informal, informalidad impositiva, informalidad laboral
    JEL: E26 H26 O4
    Date: 2011–12
  16. By: Paola Salardi (Department of Economics, University of Sussex)
    Abstract: This paper provides a unique analysis of the evolution of gender and racial occupational segregation in Brazil from 1987-2006. Drawing on a novel dataset, constructed by harmonizing national household data over twenty years, the paper provides extensive new insights in the nature and evolution of occupational segregation over time, while also providing important new insights into the forces driving these changes. The results presented here expand upon existing research in the developing world in several directions. First, the new dataset constructed for this study allows the analysis to cover a longer time period than has previously been possible. Second, the analysis explores both gender and racial segregation side by side. Third, all of the analysis is conducted for the labour market as a whole, and disaggregated into the formal, informal and self-employed labour markets. Fourth, the paper decomposes the key driving forces that lie behind trends in occupational segregation. The paper presents three major findings: first, gender segregation is always considerably greater than racial occupational segregation, but racial segregation has been more persistent over time and has several features that make it comparatively worrisome; second, while occupational segregation is declining by both gender and race, the decline has been greater in the formal labour market. Third, the decomposition of segregation measures over time reveals that changes in the internal gender and racial composition of occupations have driven improvements over time. These important differences between formal and non-formal labour markets provide preliminary insights into the possible importance of formal labour market policies and institutions in shaping outcomes.
    Keywords: Brazil, Gender, Race, Occupational Segregation, Informality.
    JEL: J15 J16 J71 O17 O54
    Date: 2011–11
  17. By: Christoph Kneiding; Alexander S. Kritikos
    Abstract: This paper investigates whether self-employed households use consumer loans - in<br /> particular instalment loans and overdrafts - to finance business activities. Controlling<br /> for financial and non-financial household variables we show that self-employed<br /> households particularly use personal overdrafts significantly more often than<br /> employee households. When analyzing the correlation between consumer loan takeups<br /> and consumption of self-employed in comparison to employee households, we<br /> find first evidence that overdrafts are used by self-employed to finance their business<br /> as well. This indicates that intermingling constitutes a financing strategy when<br /> regular business loans might not be accessible.
    Keywords: Small Business Finance, Consumer Credit, Financial Intermingling
    JEL: G32 D12 D14
    Date: 2011
  18. By: Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
    Abstract: We develop a model of vertical linkage between the formal and informal credit markets which highlights the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit, it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. However, an anticorruption measure (increase in penalty) unambiguously lowers the interest rate in the informal credit market. Finally, we examine the effects of alternative policies on the incomes of different economic agents in our model.
    Keywords: Formal/informal credit markets; informal interest rate; corruption; credit subsidy policy
    JEL: L13 O17 O16
    Date: 2011–12–15
  19. By: Guglielmo Barone (Bank of Italy); Gaia Narciso (Department of Economics, Trinity College Dublin)
    Abstract: Organized crime is a worldwide, widespread phenomenon, which affects developing as well as developed countries, and entails deep economic and social consequences. The purpose of this study is to enhance our understanding of organized crime activities. By using an innovative data set on Sicilian mafia activity available at municipality level, we test whether firms located in municipalities with mafia-related crimes obtain more public subsidies. In order to deal with the endogeneity of the relationship, we explore the origins of mafia. We instrument current mafia activity with exogenous historical and geographical shifters of land productivity, i.e. rainfall in the XIX century and geographical features at municipality level. We provide evidence that the presence of mafia affects the allocation of public transfers: municipalities with mafia activity receive larger public funding. The estimated impact of mafia is also economically relevant and equals one standard deviation of the dependent variable. According to our estimates the presence of mafia increases the total amounts of funds by about 35% on average. A series of robustness checks confirms the above findings.
    Keywords: organized crime, public transfers
    JEL: H4 K4 O17
    Date: 2011–12
  20. By: Andersson, Camilla
    Abstract: We model the economic incentives surrounding opium crop production in Afghanistan. Specifically, we examine the impact of eradication policies when opium is used as a means of obtaining credit, and when the crops are produced in sharecropping arrangements. The analysis suggests that when perfect credit markets are available, an increased risk of eradication will lead to less land being allocated to opium poppy. However, when opium is used as a means of obtaining credit, the effects of eradication are no longer clear-cut. Finally, under sharecropping arrangements, increased risk of eradication will make the tenants worse off, while landlords may benefit.
    Keywords: Eradication, Informal credit markets, Opium, Sharecropping, Crop Production/Industries, Risk and Uncertainty, Q12,
    Date: 2011–11
  21. By: Dorothée Boccanfuso (Département d’économique and GRÉDI, Université de Sherbrooke); Luc Savard (Département d’économique and GRÉDI, Université de Sherbrooke)
    Abstract: Labour market analysis is an important element to understand the inequality and poverty within a given population. The literature reveals that the informal sector is characterised by a great deal of flexibility and exempt from formal market rigidities but on the other hand, this sector can constitute a trap from which it is difficult to exit for workers active in the sector with low wages. In this paper we aim to identify the main characteristics differentiating the labor supply of workers on the informal and formal market in the Philippines while estimating these two labor supplies, capturing discrete choice or changes in employment status. We use these estimates to construct a labor supply model that can serve as an input for a broader macro-microsimulation model applied to the Philippines. The results of the estimation provide relatively intuitive findings, highlighting some differences between the two markets. We also contribute to shedding some light into this macro-microsimulation modelling framework that is generally opaque in describing how to construct a microsimulation model with endogenous discrete choice model linked to a CGE model.
    Keywords: labor supply, informal sector, microsimulation, discrete choice model, Philippines
    JEL: C35 O53 J24 C81 O17
    Date: 2011–11
  22. By: Annie Motch (Connecticut College); Gérard Forgeot (CEREGMIA, Université des Antilles et de la Guyane)
    Abstract: In 2008, Martinique’s informal sector accounted for 12,400 individuals, 9.9% of the Martinique’s total employment. Youth, retirees, men, women, the unemployed, inactives, those already employed in the formal sector, and many more make up the diverse informal sector population. Informal sector participation rates, however, have been declining in recent years; in 2002, the informal sector represented 13.2% of Martinique’s total employment (a decline of 3.3%).
    Date: 2011–06
  23. By: A. Lasagni; E. Lollo
    Abstract: Indonesia has a rich historical tradition of mutual cooperation at the community level. This study argues that rotating savings and credit associations (ROSCAs) constitute successful experiences of collective action within the informal financial sector. Therefore, using data from Indonesia Family Life Surveys, it explores the relationship between social capital and ROSCA participation and extends existing models from individual- to community-level determinants. The endowment of social capital at the village level correlates positively with individual ROSCA participation, because community social capital provides individual members with the resources needed to overcome self-selection and foster coordination -two main characteristics of ROSCAs. These results provide new evidence on the role of social capital for fostering collective action and offer new insights about community-driven development.
    Keywords: ROSCAs, informal finance, rotating savings, Indonesia
    JEL: D14 G29 O12 O53
    Date: 2011

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