nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒05‒02
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The rule of law and sustainability of the constitution: The case of tax evasion By Naqvi, Nadeem; Neumärker, Bernhard; Pech, Gerald
  2. Executives' "Off-The-Job" Behavior, Corporate Culture, and Financial Reporting Risk By Robert Davidson; Aiyesha Dey; Abbie J. Smith
  3. Cambios en la informalidad en el mercado de trabajo argentino, 2004 – 2010 By Groisman, Fernando; Vergara, Albano; Calero, Analía Verónica
  4. Close eye or closed eye: The case of export misinvoicing in Bangladesh By Gupta, Pranav Kumar; Roy, Devesh; Ahmad, Kaikaus
  5. The Business of Piracy in Somalia By Anja Shortland; Sarah Percy
  6. The use of tax havens in exemption regimes By Gumpert, Anna; Hines Jr, James R; Schnitzer, Monika

  1. By: Naqvi, Nadeem; Neumärker, Bernhard; Pech, Gerald
    Abstract: Why do rulers play by the rules? We show that the legality requirement under the rule of law implements an endogenous enforcement mechanism supporting constitutionality. Agents which do not obey unconstitutional legal norms are not sanctioned under constitutional rule. A principal who defects from the constitution but cannot commit himself to never reinstall the constitution finds law enforcement more difficult. As more agents disobey, enforcement becomes less effective. The expectation of an eventual return to constitutionality becomes self-fulfilling. We show this mechanism to be effective in deterring a government from violating constitutional norms. --
    Keywords: constitution,dynamic policy constraints,tax evasion,global games
    JEL: D78 K10 K42 H26
    Date: 2012
  2. By: Robert Davidson; Aiyesha Dey; Abbie J. Smith
    Abstract: We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) and prior legal infractions, is related to financial reporting risk. We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.
    JEL: G30 G34 G38
    Date: 2012–04
  3. By: Groisman, Fernando; Vergara, Albano; Calero, Analía Verónica
    Abstract: Labor informality verified a marked decrease in the period 2004 -2010 accompanying the fall in unemployment. However, the informal employment is still at around 45% in the employment structure in Argentina. The aim of this paper is to analyze the changes in the composition of informal workers in the period 2004 -2010 in Argentina. The results obtained allow to state that there was a marked reduction in the incidence of informal employment in line with the favorable economic development. However, the reduction of informality was not so widespread in the major components thereof. Specifically, it was observed that the groups that showed the largest reductions were those of self-employed and unregistered employees in small establishments. This warrants further research addressing the persistence of informality in larger establishments.
    Keywords: segmented labor market; informal employment
    JEL: J4 J2
    Date: 2011–08
  4. By: Gupta, Pranav Kumar; Roy, Devesh; Ahmad, Kaikaus
    Abstract: Export subsidies can generate or curb many perverse incentives for exporters, their expansionary effects on exports notwithstanding. These include expansion into soft markets or even deflection of domestic production into markets with similar taste and product specifications. Also, if there is under-invoicing, in principle it should decline with export subsidies since the government makes cash transfers based on the invoice presented to the authorities. In this paper, we study the effect of export subsidies on the under-invoicing of exports in Bangladesh. In a framework that allows for unobserved heterogeneity among importing countries and product specificities, we find evidence for under-invoicing in Bangladesh. The evidence at first seems counterintuitive, with a statistically significant increase in under-invoicing after introduction of a subsidy. After a more careful analysis, however, the positive incentives for under-invoicing can be explained by reasons such as black market premium (BMP) in foreign exchange markets or domestic tax evasion (among other factors). Even though BMP has been declining in Bangladesh over time, the incentives to evade domestic taxes (particularly with a nonlinear tax schedule and inclusion of subsidies on the inflow side of a firm's balance sheet) remain strong, bolstered by weak enforcement.
    Keywords: under-invoicing, over-invoicing, export subsidies, domestic taxes,
    Date: 2012
  5. By: Anja Shortland; Sarah Percy
    Abstract: This article argues that it will be difficult, if not impossible, to control Somali piracy for four reasons. First, Somali piracy is a land-based problem and naval control mechanisms are not changing the incentives for pirates. Second, improving Somalia's anarchic political situation will not necessarily stop piracy. Our analysis demonstrates that piracy is a business which improves with a more stable environment. Third, piracy is organized criminal activity, and like other organized crime groups will be difficult to control, especially if it becomes embedded in state structures. Finally, we argue that few of the relevant players have any real incentives to alter their behaviour.
    Date: 2011–08
  6. By: Gumpert, Anna; Hines Jr, James R; Schnitzer, Monika
    Abstract: This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income.
    Keywords: Manufacturing FDI; Multinational Firms; Profit Shifting; Service FDI; Tax Avoidance; Tax Havens
    JEL: F23 H87
    Date: 2012–04

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