nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒07‒23
fourteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. To misreport or not to report? The measurement of household financial wealth By Andrea Neri; Maria Giovanna Ranalli
  2. An Experimental Study of Taxpayer Compliance Behavior Under Alternative Reporting Regimes By Bombyk, Matthew
  3. Informal Credit and Factor Productivity in Africa: Does Informal Credit Matter? By Owuor, George; Shem, A.O.
  4. Financial Dependence, Formal Credit and Firm Informality: Evidence from Peruvian Household Data By Eduardo Morón; Edgar Salgado; Cristhian Seminario
  5. The Impact of Bank Credit on Employment Formality in Uruguay By Nestor Gandelman; Alejandro Rasteletti
  6. Employment Subsidies, Informal Economy and Women’s Transition into Work in a Depressed Area: Evidence from a Matching Approach By Manuela Deidda; Adriana Di Liberto; Marta Foddi; Giovanni Sulis
  7. The Political Economy of Rural Property Rights and the Persistence of the Dual Economy By Leopoldo Fergusson
  8. Environmental Regulation, Pollution and the Informal Economy By Ceyhun Elgin; Ummad Mazhar
  9. Intimations of Keith Hart's 'Informal Economy' - In the Work of Henry Mayhew, P T Bauer and Richard Salisbury By John D. Conroy
  10. The macroeconomic impact of organized crime: a neo-Kaleckian perspective By Capuano, Carlo; Purificato, Francesco
  11. With which countries do tax havens share information? By Katarzyna Bilicka and Clemens Fuest
  12. Multinationals versus cooperatives: The income and efficiency effects of supply chain governance in India By Vandeplas, Anneleen; Minten, Bart; Swinnen, Johan F.M.
  13. Collective action in commercial mushroom production: the role of social capital in the management of informal farmer groups in Swaziland By Mabuza, M.L.; Ortmann, G.F.; Wale, E.Z.
  14. La rente et l'État rentier recouvrent-ils toute la réalité de l'Algérie d'aujourd'hui ? By Fatiha Talahite

  1. By: Andrea Neri (Bank of Italy); Maria Giovanna Ranalli (Department of Economics, Finance and Statistics, University of Perugia)
    Abstract: The objective of the paper is to adjust for the bias due to unit non-response and measurement error in survey estimates of total household financial wealth. Sample surveys are a useful source of information on household wealth. Yet, survey estimates are affected by non-sampling errors. In particular, in the case of household wealth, unit non-response and measurement error can severely bias the estimates. Using the Italian Survey on Household Income and Wealth (SHIW), we exploit the available auxiliary information in order to assess the magnitude of this bias. We find evidence that for this kind of survey, non-sampling errors are a major issue, possibly more serious than sampling errors. Moreover, in the case of SHIW the potential bias due to measurement error seems to outweigh that induced by non-response.
    Keywords: unit non-response, measurement error, auxiliary information, subsampling, imputation
    JEL: C2 C42 D31
    Date: 2012–07
  2. By: Bombyk, Matthew
    Abstract: Underreporting of income is a costly problem for the government and for those people who do pay their taxes, due to the necessity of higher tax burdens to sustain a given amount of revenue. An extensive research report published by the IRS this year estimates that in the United States in 2006 the “tax gap” between paid taxes and legally owed taxes was $450 billion, which means 16.9 percent of total tax liabilities were evaded that year (Black et al., 2012). The IRS recovered $65 billion from late payments and audits, but that still left 14.5 percent noncompliance. Breaking the tax gap down into finer categories, the IRS finds that the vast majority (84 percent) comes from underreporting of income, most of that (62.5 percent) comes from individual income taxes, and most of that (52 percent) is small business proprietor’s income. This totals to 27 percent of noncompliance due to underreporting of individual proprietor income. It is estimated that 57 percent of business income is not reported (Black et al., 2012). Wages make up a small fraction of underreporting, mostly due to the fact that firms must report employee income directly to the IRS, and withholding is common, so a relatively disinterested third party makes the decision of how much income is reported (Slemrod, 2008). Slemrod emphasizes the importance of enforcement in compliance behavior, citing the fact that income subject to withholding and substantial information reporting (wages) has a 1 percent noncompliance rate, compared to 56 percent noncompliance for income with little or no information reporting requirements. Given the difficulty of identifying cheaters and the cost of increasing the rate of auditing, a better understanding of the determinants of noncompliance is needed 1 to reduce the magnitude of tax cheating. To address a part of the tax evasion quandary, Kalambokidis et al. (2012) conducted a laboratory experiment1 which was designed to examine the feasibility of using the choice between a high-burden,2 low-transparency and a low-burden, high-transparency tax regime, as a mechanism to separate out those who have higher and lower propensities to cheat when reporting their income. The results are the subject of this paper.
    Keywords: Financial Economics, Institutional and Behavioral Economics, Public Economics,
    Date: 2012–07
  3. By: Owuor, George; Shem, A.O.
    Abstract: It is widely documented that credit is an important instrument among resource poor farmers in developing economies. However, accessing loans from formal credit institutions has proved almost impossible for small and resource poor farmers leading to reliance on the least regulated informal credit sources such as the Grameen type institutions (Micro-Finance Institutions-MFIs) that peg lending to memberships in social networks such as groups. In spite of the growing preference to this type of lending, very little is known on their contribution among farm related productive activities in Kenya. This paper attempts to illuminate the role of lending via groups on economic performance of smallholder farmers via changes in purchased factor use between borrowers and non-borrowers. We employ endogenous switching regime approach (accomplished via heckman selection correction model) on a sample of 401 respondents made up of 180 borrowers and 221 non-borrowers from two districts in Kenya. Results show significant effects of group based lending on production via improved factors such as fertilizer, planting materials and crop chemicals, as well as on investment in non-farm businesses, hired labour, and in renting in more land. However, descriptive results indicate high fungibility of this type of credit, with over 20% use on non-productive activities, which infringe on expected output effects. Supervision and or issuing of credit in form of inputs could generate expected impact.
    Keywords: Informal Micro-Credit, Rural Smallholder Farmers, Productivity, Kenya, Agricultural Finance, International Relations/Trade,
    Date: 2012
  4. By: Eduardo Morón; Edgar Salgado; Cristhian Seminario
    Abstract: This paper examines the link between financial deepening and formalization in Peru. Using data from the National Household Survey, Bloomberg and the Central Bank of Peru Central Bank, the Cata~o, Page´s, and Rosales (2009) model is implemented at activity level (2-digits ISIC), and the Rajan and Zingales (1998) approach of sectors’ dependence on external funds is followed. The sample is divided into three firm size categories, and two formality measures are assessed. Using the accounting books specification, robust results are obtained, supporting a significant and positive effect of credit growth on formalization only for the self-employment firms category. Alternatively, using the pension enrollment specification, the channel is found positively significant only for firms with more than 10 workers; there is a smaller effect for firms with 2-10 workers. There is also a significant between effect, explaining the transition from small firms to larger firms due to greater credit availability.
    JEL: E26 G21 O16 O4
    Date: 2012–05
  5. By: Nestor Gandelman; Alejandro Rasteletti
    Abstract: This paper examines the effect of bank credit on employment formalization in Uruguay. Using a difference-in-differences methodology proposed by Cata~o, Page´s and Rosales (2011), the paper finds that financial deepening decreases informality, especially in more financially dependent sectors. The effect is additionally found to be greater for women and younger workers. Despite the severe economic crisis and a sharp contraction of bank credit experienced by the economy in the period of analysis, no evidence is found that the effect of bank credit on employment formality has changed over time.
    JEL: E26 G21 O16 O4
    Date: 2012–04
  6. By: Manuela Deidda; Adriana Di Liberto; Marta Foddi; Giovanni Sulis
    Abstract: We analyse the effects of an active labour market program for disadvantaged workers recently implemented in an Italian depressed area. Our sample includes 859 workers, mostly women, who entered the program before April 2008 and were subsequently interviewed in 2009-10. We complement the existing administrative data with survey data that enables us to control for numerous individual and labour market characteristics for both treated and non-treated individuals. Using propensity-score matching methods, we do find that the employment subsidy had a positive and significant effect (ATT) on both the probability of finding a job for participants and on their level of income. We also control for effect heterogeneity and find that the outcome of the policy was higher for women and, among them, we also find that the program was more effective on less educated and older female workers. Finally, we exploit unique information on previous contacts between workers and firms and on the use of informal channels for job search activity to explore the role of underground employment relations for the effectiveness of the policy.
    Keywords: Active Labour Market Programs; Female Labour-force participation; Employment Subsidies; Propensity Score Matching; Informal networks
    JEL: C14 J64 J16
    Date: 2012
  7. By: Leopoldo Fergusson
    Abstract: If property rights in land are so beneficial, why are they not adopted more widely? I propose a theory based on the idea that limited property rights over peasants' plots may be supported by elite landowners (who depend on peasants for labour) to achieve two goals. First, like other distortions such as taxation, limited property rights reduce peasants' income from their own plots, generating a cheap labour force. Second, and unlike taxation, they force peasants to remain in the rural sector to protect their property, even if job opportunities appear in the urban sector. The theory identifies conditions under which weak property rights institutions emerge, providing a specific mechanism for the endogenous persistence of inefficient rural institutions as development unfolds. It also predicts a non-monotonic relationship between the quality of rural property rights and land in the hands of peasants.
    Date: 2012–06–14
  8. By: Ceyhun Elgin; Ummad Mazhar
    Date: 2012–07
  9. By: John D. Conroy
    Abstract: This paper considers the idea of informality in market exchange, as introduced into the economic development literature by Keith Hart in the 1970s. In addition to Hart (1971, 1973) it will discuss three writers who may be considered his intellectual forerunners. Each, to a greater or less degree, anticipated the idea of informal economic activity and described it in a particular historical period and place. They are the mid-Victorian journalist Henry Mayhew (London, c.1850), the libertarian economist P. T. Bauer (British West Africa, c.1948) and the economic anthropologist R. F. Salisbury (colonial New Guinea, c.1952-1963). The principal texts relied upon are Mayhew's monumental London Labour and the London Poor (4 vols, 1851-61), Bauer's Economics of Under-Developed Countries (1957) and Salisbury's From Stone to Steel (1962) and Vunamami: Economic Transformation in a Traditional Society (1970).
    Keywords: informal economy, informal sector, Keith Hart, Henry Mayhew, P. T. Bauer, Richard Salisbury
    JEL: B20 B25 B31 J40 J49 O10 O17 Z10
    Date: 2012–03
  10. By: Capuano, Carlo; Purificato, Francesco
    Abstract: The paper analyzes how organized crime affects the economy through its impact on the effective demand, following the Neo-Kaleckian approach. From this perspective, the presence of organized crime, on the one hand, tends to reduce the effective demand draining resources through extortion, bribery of public officials and encouraging consumption of criminal goods (illegal goods and goods produced in the underground economy), on the other hand, tends to increase the effective demand using the proceeds of criminal activity in the purchase of legal consumption and investment goods. The model highlights the opposing action of these two forces and identifies the conditions for a negative impact on the degree of capacity utilization and the growth rate. For the latter, these conditions tend to be more stringent, due to the direct impact of organized crime on investment decisions. Overall, the operation of organized crime tends to negatively influence the economic activity to the extent that the income drained from the legal sector is not reused into the same sector.
    Keywords: Neo-Kaleckian; macroeconomics; organized crime; illegal or illicit markets
    JEL: E12 E2 O17 K4
    Date: 2012–07
  11. By: Katarzyna Bilicka and Clemens Fuest
    Abstract: In recent years tax havens and offshore financial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and efforts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ineffective. We analyse 555 TIEAs signed by tax havens in the years 2008-2011 and find that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
    Date: 2012–06–15
  12. By: Vandeplas, Anneleen; Minten, Bart; Swinnen, Johan F.M.
    Abstract: The impact of multinational firms on the domestic agricultural sector in developing countries is controversial, in particular in India. Relying on a unique set of household-level data from the state of Punjab, we study the biggest dairy company in the world (Nestlé) in India and compare its vertical spillover effects on upstream suppliers to other market channels (informal sector and cooperatives). We find that farmers that supply informal channels are less efficient and earn less profits per dairy animal than farmers supplying the cooperative and the multinational sector. Further, we find that farmers in the multinational channel are more efficient than farmers in the cooperative channel, but equally profitable. Hence, we do not find that supplying the cooperative channel is more beneficial for local dairy farmers than supplying the multinational channel. Overall, however, dairy productivity and profitability levels are still dramatically low, with tremendous scope for dairy development.
    Keywords: cooperatives, foreign direct investment, income, productivity, India, dairy, Agribusiness, Agricultural and Food Policy, Consumer/Household Economics, Industrial Organization, International Development,
    Date: 2012
  13. By: Mabuza, M.L.; Ortmann, G.F.; Wale, E.Z.
    Abstract: With over 90% of mushroom producers having opted to participate in the industry through informal farmer groups, this paper sought to identify the key factors that unify members of informal collective initiatives. In contrast to formal organisations, which are regulated by law, informal groups are fully autonomous and not regulated by any legal instrument in Swaziland. Based on a conceptual framework that uses social capital dimensions to study collective action, trust, cooperation and communication were identified as the key elements responsible for ensuring cohesion in informal groups engaged in mushroom production. Further analysis indicated that trust is positively influenced by gender, age and religion, while cooperation was found to be influenced by members’ dependence on mushrooms for food. Communication, on the other hand, was found to be positively influenced by the level of trust and member cooperation. The empirical evidence indicates that members from communities characterized by positive cognitive social capital are most likely to engage in voluntary collective action in an attempt to improve their livelihoods. The study, therefore, recommends that informal groups developed voluntarily by community members should be encouraged and embraced as an important element of Swaziland’s development agenda.
    Keywords: collective action, social capital, mushrooms, Swaziland, Crop Production/Industries, Farm Management,
    Date: 2012
  14. By: Fatiha Talahite (CRESPPA - Centre de recherches sociologiques et politiques de Paris - CNRS : UMR1742 - Université Paris VIII - Vincennes Saint-Denis)
    Abstract: Partant du constat de l'hégémonie des concepts de rente et d'état rentier dans la littérature en sciences sociales et humaines sur l'Algérie, cet article revient sur le processus qui a mené à la domination des hydrocarbures sur l'économie et l'État algériens. Cette emprise s'est intensifiée depuis 1992, lorsque la réforme visant à légaliser le marché, par un processus de légitimation des institutions ayant conduit à une ouverture du champ politique, fut brutalement interrompue. Il montre comment un pouvoir illégitime, par son effet dissolvant du droit et de la légalité, pousse à l'informalisation de l'activité économique, pour ne laisser finalement apparaître comme seule réalité que la rente et l'état rentier. Il indique que le chemin pour en sortir et aller vers la réhabilitation de l'économie et des institutions, passe par un acte fondant dans les urnes une nouvelle légitimité.
    Keywords: "Algérie" ; "rente" ; "État rentier"; "transition" ; "marché intérieur".
    Date: 2012–06–30

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