nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒04‒17
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Compliance costs caused by agency action? Empirical evidence and implications for tax compliance By Sebastian Eichfelder; Chantal Kegels
  2. The effects of tax evasion and the inefficiency of the legal system on firms’ financial constraints: are they complements or substitutes?. By Germana Giombini; Désirée Teobaldelli
  3. Is India’s Manufacturing Sector Moving Away From Cities? By Ejaz Ghani; Arti Grover Goswami; William R. Kerr
  4. Optimal participation in illegitimate market activities: complete analysis of 2-dimensional cases By Carfì, David; Pintaudi, Angelica

  1. By: Sebastian Eichfelder (University of Wuppertal - Schumpeter School of Business and Economics); Chantal Kegels
    Abstract: The compliance costs of private taxpayers are not only affected by the tax law itself but also by its implementation through the tax authorities. In this paper we analyze the effect of the tax authorities on the burden of complying with tax regulations. Using survey data of Belgian businesses and controlling for potential endogeneity, we find empirical evidence that tax authority behavior is an important cost driver. According to our estimate, a customer-unfriendly tax administration increases the average compliance costs by about 25 %. Our outcome has interesting implications for tax compliance research. First of all, taxpayer services do not only affect “soft” factors like fairness and trust, but also “hard” aspects like costs. Furthermore, there may be an inherent ability of the administration to “punish” non-cooperative businesses by in-creased cost-burdens.
    Keywords: Tax compliance costs, Red tape, Tax administration, Tax compliance, Tax evasion, Tax authority behavior
    JEL: H26 H25 H83
    Date: 2012–04
  2. By: Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Désirée Teobaldelli (Department of Law, Università di Urbino "Carlo Bo")
    Abstract: This paper analyzes the joint impact of tax evasion and the inefficiency of the legal system on firms’ financial constraints. We find that both variables have a statistically significant effect on the difficulties that firms encounter when trying to access financing and this effect is nonlinear. In particular, tax evasion and the inefficiency of the legal system are substitute as they mitigate each other’s effects on firms’ credit constraints. It means that the negative impact of tax evasion on financial constraints faced by firms decreases in the presence of a lower efficiency of the legal system.
    Keywords: Financial constraints, Tax evasion, Legal system efficiency.
    JEL: D2 G3 H26 K4
    Date: 2012
  3. By: Ejaz Ghani (World Bank); Arti Grover Goswami (World Bank); William R. Kerr (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: This paper investigates the urbanization of the Indian manufacturing sector by combining enterprise data from formal and informal sectors. We find that plants in the formal sector are moving away from urban and into rural locations, while the informal sector is moving from rural to urban locations. While the secular trend for India's manufacturing urbanization has slowed down, the localized importance of education and infrastructure have not. Our results suggest that districts with better education and infrastructure have experienced a faster pace of urbanization, although higher urban-rural cost ratios cause movement out of urban areas. This process is associated with improvements in the spatial allocation of plants across urban and rural locations. Spatial location of plants has implications for policy on investments in education, infrastructure, and the livability of cities. The high share of urbanization occurring in the informal sector suggests that urbanization policies that contain inclusionary approaches may be more successful in promoting local development and managing its strains than those focused only on the formal sector.
    Keywords: Urbanization, structural transformation, transition, development, manufacturing, agglomeration, industrialization, growth, India.
    JEL: J61 L10 L60 O10 O14 O17 R11 R12 R13 R14 R23
    Date: 2012–04
  4. By: Carfì, David; Pintaudi, Angelica
    Abstract: In this paper we consider the quantitative decision problem to allocate a certain amount of time upon two possible market activities, specifically a legal one and an illegal one: this problem was considered in literature by Isaac Ehrlich (in his seminal paper “Participation in Illegitimate Activities: A Theoretical and Empirical Investigation”, published in The Journal of Political Economy, in 1973) and the mathematical model we propose and use is essentially a formal mathematical translation of the ideas presented by him. On the other hand, our approach will allow to apply efficiently and quantitatively the Ehrlich qualitative model. Specifically, in this original paper, we apply the Complete Pareto Analysis of a differentiable decision problem, recently introduced in literature by David Carfì, to examine exhaustively the above Ehrlich-kind decision problem. An Ehrlich-kind decision problem is given by a pair P = (f, >), where the function f : T → E is a vector payoff function defined upon a compact m-dimensional decision (time) constrain T and with values into the m-dimensional payoff space E, for some natural number m (in our paper m is 2). So, the principal aim of this paper is to show how Carfì's Pareto Analysis can help to face, quantitatively, the decision problems of the Ehrlich-type in some practical cases; also, the computational aspects were not considered by Ehrlich. Our methodologies and approaches permit (in principle), by giving a total quantitative view of the possible payoff space of Ehrlich-decision problems (and consequently, giving a precise optimal solutions for the decision- maker), to perform quantitative econometric verifications, in order to test the payoff functions chosen in the various Ehrlich models. In particular, we apply our mathematical methodology to determine the topological boundary of the payoff space of a decision problem, for finding optimal strategies in the participation in such legal and illegitimate market activities. The theoretical framework is clarified and applied by an example.
    Keywords: Quantitative decision problem; allocation of time; legal and illegal activities
    JEL: O17 P37 K4
    Date: 2012

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