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on Informal and Underground Economics |
| By: | Ogndal, Tone (Dept. of Economics, University of Oslo) |
| Abstract: | Why do not people evade more taxes when their gain from evasion is higher than the expected penalties? Why does only a small minority evade when a large majority is willing to? These tax evasion puzzles are explained in a labour market framework where employees may combine reported work in firms with self-employed shadow work. On the margin, time spent on self-employed work reduces labour productivity in reported work. This creates an equilibrium where small, low-productive firms offer jobs with low wage rates but time for self-employed shadow work, while larger, more efficient firms offer jobs with higher reported wage rates but no time for shadow work. Improving the tax morale may not reduce evasion but only sort the honest people into jobs with no time for shadow work. Shadow work leads to an inefficient allocation of employees since it has the effect of a subsidy to low productive firms. Both lower taxes and minimum wages reduce evasion and improve labour allocation but harms low productive firms. |
| Keywords: | Shadow work; Tax evasion; Labour market |
| JEL: | H26 J29 K34 |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2012_005&r=iue |
| By: | Araujo, Ricardo Azevedo; Moreira, Helmar Nunes |
| Abstract: | In this paper the existence and stability of equilibria in an evolutionary game theory model of the labor market is studied by using the Lyapunov method. The model display multiple equilibria and it is shown that the Nash Equilibria of the static game are evolutionary stable equilibria in the game theory evolutionary set up. In this vein a complete characterization of the dynamics of an evolutionary model of the labor market is provided. |
| Keywords: | Evolutionary game theory approach, labour market, informal economy, Lyapunov function |
| JEL: | C73 J23 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36991&r=iue |
| By: | Araujo, Ricardo Azevedo; Moreira, Helmar Nunes |
| Abstract: | In this paper the existence and stability of equilibria in an evolutionary game theory model of the labor market is studied by using the Lyapunov method. The model display multiple equilibria and it is shown that the Nash Equilibria of the static game are evolutionary stable equilibria in the game theory evolutionary set up. In this vein a complete characterization of the dynamics of an evolutionary model of the labor market is provided. |
| Keywords: | Evolutionary game theory approach, labour market, informal economy, Lyapunov function |
| JEL: | C73 J23 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36931&r=iue |
| By: | Sonali Jain-Chandra; Adil Mohommad; Anoop Singh |
| Abstract: | Worldwide protests against the perceived lack of economic opportunity and failure of governance have refocused attention on the need for inclusive growth and strong institutions. In developing countries, large informal economies limit state capacity to deliver governance and strong institutions, which in turn discourages participation in and expansion of the formal economy. This paper analyzes the determinants of the underground economy, with particular emphasis on the role of institutions and the rule of law. We find that when businesses are faced with onerous regulation, inconsistent enforcement and corruption, they have an incentive to hide their activities in the underground economy. Empirical analysis suggests that institutions are a more important determinant of the size of the underground economy than tax rates. |
| Keywords: | Developing countries , Economic growth , Financial sector , Fund role , Governance , Shadow economy , |
| Date: | 2012–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/47&r=iue |
| By: | Bennett, John (Brunel University); Rablen, Matthew D. (Brunel University) |
| Abstract: | We construct a simple model incorporating various urban labour market phenomena obtaining in developing economies. Our initial formulation assumes an integrated labour market and allows for entrepreneurship, self-employment and wage employment. We then introduce labour market segmentation. In equilibrium voluntary and involuntary self-employment, formal and informal wage employment, and formal and informal entrepreneurship may all coexist. We illustrate the model by an example calibrated on Latin American data, examining individual labour market transitions and implications of education/training and labour market policies. To diminish informality, cutting the costs of formality is more effective than raising those of informality. |
| Keywords: | self-employment, wage employment, informality |
| JEL: | O17 J23 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6406&r=iue |
| By: | de Mel, Suresh; McKenzie, David; Woodruff, Christopher |
| Abstract: | The majority of firms in most developing countries are informal. The authors of this paper conducted a field experiment in Sri Lanka that provided incentives for informal firms to formalize. Offering only information about the registration process and reimbursement for direct registration costs had no impact on formalization. Adding payments equivalent to one-half to one month's profits for the median firm led to registration of around one-fifth of firms. A larger payment equivalent to two months'median profits induced half the firms to register. The main reasons for not formalizing when offered incentives included issues related to ownership of land and concerns about facing labor taxes in the future. The degree of bureaucracy in the registration process also seems to matter for those with the incentive to register, with response to the incentives higher in Colombo, where the registration process was easier, than in Kandy. Three follow-up surveys, at 15 to 31 months after the intervention, measure the impact of formalizing on these firms. Although mean profits increased, this appears largely due to the experiences of a few firms that grew rapidly, with most firms experiencing no increase in income as a result of formalizing. The authors also find little evidence for most of the channels through which formalization is hypothesized to benefit firms, although formalized firms do advertise more and are more likely to use receipt books. In qualitative interviews owners of formalized firms also feel their businesses have more legitimacy. Finally, formalizing is found to result in a large increase in trust in the state. Their focus is largely on the private costs and benefits of existing firms formalizing. Within their sample they cannot measure broader impacts of formalization on other firms (who may prosper from not having to compete against informal firms not paying taxes), nor impacts of easier formalization on entry of new firms. Nevertheless, our results suggest that although most informal firms do not want to formalize, given the current private costs and benefits of formalizing, policy efforts that lead to relatively modest increases in the net benefits of formalizing would induce a sizeable share of informal firms to formalize. |
| Keywords: | Microfinance,Economic Theory&Research,E-Business,Access to Finance,Debt Markets |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5991&r=iue |
| By: | R. Orsi; D. Raggi; F. Turino |
| Abstract: | We study a new approach to estimating the underground economy that is based on a dynamic and stochastic general equilibrium (DSGE) framework. In particular, we generalize an otherwise standard two-sector DSGE model by introducing explicitly underground production and irregular market sectors. In this setup, firms can choose to produce goods for the regular market as well as for the underground sector, and households can evade taxes by reallocating their worked hours from the regular to the irregular labor market. The firms can be discovered evading with a given probability and forced to pay a penalty surcharge. Empirical evidence based on Italian data stresses that this phenomenon is relevant in Italy because the estimated size of the underground economy is approximately 22% of the GDP, which is 3 percentage points larger than the number reported in the official statistics. Counterfactual analysis suggests that an increase in the probability of being discovered and in the penalty surcharge, along with a moderate tax reduction, causes a sensitive reduction in the size of the underground economy and a positive stimulus to the official economy that jointly increases the total fiscal revenues. |
| JEL: | E65 O41 O52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp818&r=iue |
| By: | Kar, Saibal (Centre for Studies in Social Sciences, Calcutta); Roy, Poulomi (Jadavpur University); Saha, Sarani (Indian Institute of Technology Kanpur) |
| Abstract: | This paper tries to document the presence of unreported income among public sector employees in India. We investigate empirically the wage gap as well as consumption expenditure parity between public and private sector workers. It tests the hypothesis that despite a lower level of public sector income in some of the quantiles, if the level of durable goods consumption between the private and the public sector employees are similar, then it might be indicative of the presence of unreported income among the public sector workers. The 2004-05 survey of income and consumption by workers in both private and public sectors (NSSO) supports presence of unaccounted for income among public sector employees at the uppermost quantile. The empirical part is followed by a generalized theoretical formulation that comes up with a measure of the equilibrium level of the unreported income earned by the public sector employees. |
| Keywords: | unreported income, consumption, indirect utility, quantile regression, India |
| JEL: | C12 C31 D23 J21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6404&r=iue |