nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒03‒28
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Unemployment, tax evasion and the "slippery slope" framework By Lisi, Gaetano
  2. Decentralized Deterrence, with an Application to Labor Tax Auditing By Di Porto, Edoardo; Persico, Nicola; Sahuguet, Nicolas
  3. The Costs of VAT: A Review of the Literature By Luca Barbone; Richard Bird; Jaime Vázquez Caro
  4. Financial Transaction Tax Contributes to More Sustainability in Financial Markets By Dorothea Schäfer
  5. How does relationship-based governance accommodate new entrants? Evidence from the cycle rickshaw rental market By Jain, Tarun; Sood, Ashima
  6. The Underground Economy of Fake Antivirus Software By Steigerwald, Douglas; Vigna, Giovanni; Kruegel, Christopher; Kemmerer, Richard; Abman, Ryan; Stone-Gross, Brett

  1. By: Lisi, Gaetano
    Abstract: The proposed theoretical work introduces the basic insights of the ‘slippery slope’ framework into the benchmark macroeconomic model of the labour market in order to study the relation between tax compliance (both voluntary and enforced), tax evasion and unemployment. This paper shows that the firm's decision to evade taxes also depends on trust in tax authorities, and affects one of the most important macroeconomic variables: the unemployment rate. Also, the model is able to mimic the crucial interaction between trust and power and its effects on voluntary and enforced compliance. The main result is that with the “right mix” of policy tools of deterrence, trust in tax authorities is maximised, (voluntary) tax compliance increases and a reduction of tax evasion may decrease unemployment.
    Keywords: tax evasion; tax compliance; trust and power; unemployment
    JEL: J64 K42 H26
    Date: 2012–03–18
  2. By: Di Porto, Edoardo; Persico, Nicola; Sahuguet, Nicolas
    Abstract: Deterrence of illegal activities is frequently carried out by many atomistic auditors (tax auditors, law enforcement agents, etc.). Not much is known either normatively about the best way to incentivize atomistic auditors, nor positively about what these incentives actually look like in real world organizations. This paper focuses almost exclusively on the positive question. It proposes a game-theoretic model of decentralized deterrence and an empirical test, based on the equilibrium of the model, to identify the incentives of individual auditors. In the special (but important) case of tax enforcement, the paper fully characterizes the equilibrium of a strategic auditing game and provides a method to calibrate its parameters based on audit data. Applying the model and method to Italian auditing data provides ‘proof of concept’: the methods are practical and tractable. We are able to provide an estimate of tax evasion based on (non-random) audit data alone. Counterfactual simulation of the model quantifies the costs and benefits of alternative auditing policies. We compare decentralized enforcement with a counterfactual commitment policy, and compute the loss from the former. Thus we are able to quantify the costs of decentralizing enforcement.
    Keywords: audits; deterrence; tax evasion
    JEL: H26 H83 K42
    Date: 2012–03
  3. By: Luca Barbone; Richard Bird; Jaime Vázquez Caro
    Abstract: This paper reviews the published literature on the definition and measurement of the administrative and compliance costs of taxation, with special reference to VAT (including evasion and fraud) in the European Union.
    Keywords: Taxation, Subsidies, Revenue
    JEL: H20 H21 H25 H26 M48
    Date: 2012
  4. By: Dorothea Schäfer
    Abstract: We argue that a financial transaction tax complements financial market regulation. With the tax, governments have an additional instrument at hand to influence trading activity. FTT aims to reduce regulatory arbitrage, flash trading, overactive portfolio management, excessive leverage and speculative transactions of financial institutions. The focus clearly addresses these classes of activities that have contributed to the financial crisis. However, if contrary to expectations harmful transactions will not be curbed, FFT generates at least large tax revenues that can contribute to cover the costs of the financial crisis. The trend towards centralized clearing and depositaries makes tax evasion more difficult than it was in the past. Tax avoidance is, of course, never completely avoidable. Therefore the effect of the tax should be monitored closely so that governments can react quickly if tax loopholes and taxinduced geographical relocation plans of financial institutions come to light.
    Keywords: Financial stability, transaction tax, public good, central depository
    JEL: G20 G24 G28
    Date: 2012
  5. By: Jain, Tarun; Sood, Ashima
    Abstract: A large theoretical and empirical literature suggests that the salience of network-based ties in contract enforcement under relation-based governance systems limits market expansion. This paper illustrates the incorporation of new agents into market exchange under conditions of informal contract governance using a case study of the cycle-rickshaw rental market in a city in central India. Our analytical model formalizes features of this market through a higher penalty of default for migrants that introduces a gap between the ex ante risk for out-of-network agents and the ex post risk. The model predicts a sorting equilibrium such that migrants are more likely to participate in the rental contract. We test this prediction using primary survey data with multidimensional measures of migrant status and find that it is a significant predictor of rental contract participation, even controlling for credit access and other variables that moderate the rickshaw driver’s ability to own a cycle-rickshaw.
    Keywords: Urban informal sector; Contract enforcement; Rural to urban migration
    JEL: L14 O18 O17 L92 O15 J61 R23
    Date: 2012–02–08
  6. By: Steigerwald, Douglas; Vigna, Giovanni; Kruegel, Christopher; Kemmerer, Richard; Abman, Ryan; Stone-Gross, Brett
    Abstract: Fake antivirus (AV) programs have been utilized to defraud millions ofcomputer users into paying as much as one hundred dollars for a phony softwarelicense. As a result, fake AV software has evolved into one of the most lucrativecriminal operations on the Internet. In this paper, we examine the operations of threelarge-scale fake AV businesses, lasting from three months to more than two years.More precisely, we present the results of our analysis on a trove of data obtainedfrom several backend servers that the cybercriminals used to drive their scam operations.Our investigations reveal that these three fake AV businesses had earned acombined revenue of more than $130 million dollars. A particular focus of our analysisis on the financial and economic aspects of the scam, which involves legitimatecredit card networks as well as more dubious payment processors. In particular, wepresent an economic model that demonstrates that fake AV companies are activelymonitoring the refunds (chargebacks) that customers demand from their credit cardproviders. When the number of chargebacks increases in a short interval, the fakeAV companies react to customer complaints by granting more refunds. This lowersthe rate of chargebacks and ensures that a fake AV company can stay in businessfor a longer period of time. However, this behavior also leads to unusual patternsin chargebacks, which can potentially be leveraged by vigilant payment processorsand credit card companies to identify and ban fraudulent firms.
    Keywords: Economics, General, cheating, computer security, fraud detection
    Date: 2011–06–01

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