nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒07‒29
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality and agglomeration economies: in search of the missing links By Ana Isabel Moreno Monroy; Michiel Gerritse
  2. Urbanización informal: diagnósticos y políticas. Una revisión al debate latinoamericano para pensar líneas de acción actuales By Samuel Jaramillo
  3. Is There an Informal Employment Wage Premium? Evidence from Tajikistan By Arabsheibani, Reza; Staneva, Anita V.
  4. The use of tax havens in exemption regimes By Gumpert, Anna; Hines Jr., James R.; Schnitzer, Monika
  5. Financing needs of nascent entrepreneurs in Chile: does gender matter? By Gianni Romani; Miguel Atienza; Ernesto Amorós
  6. Are Small Firms more cyclically Sensitive than Large Ones? National, Regional and Sectoral Evidence from Brazil. By T√∫lio Cravo
  7. The Binary Choice Approach of Laffer Curve By Mihai Mutascu

  1. By: Ana Isabel Moreno Monroy; Michiel Gerritse
    Abstract: The informal sector absorbs on average 50% of employment in developing countries. However, it has not been considered in New Economic Geography (NEG) models that try to explain urbanization and agglomeration in developing countries. In a first attempt to bridge this gap, we develop a NEG model that incorporates the informal sector. Empirical evidence shows that the informal sector is mainly composed of relatively small firms that are unskilled labor intensive, face capital restrictions and that, given scale limitations, do not trade interregionally or internationally. Thus, besides an increasing returns to scale manufacturing sector, our model allows for an informal services sector with constant returns to scale and high transport cost. We investigate competitive as well as complementary roles for the informal sector and the manufacturing sector. To do so, we model competition on the demand side by allowing substitution between manufacturing and informal sector goods and complementary linkages on the production side, in the form of input requirements in manufacturing from the informal sector. Labor is mobile between industries and locations. The model predicts where informal employment flourishes. An informal sector arises at every location, but depending on manufacturing transport cost and preferences, the industrial or the rural location hosts the larger share of informal production. Vice versa, the size and characteristics of the informal sector have an effect on the long run outcome of the model. Not only does the informal sector influence the model’s centripetal forces, but informal supply shocks (and regulation) may also determine the selection of one of multiple long run equilibria. Thus, an expanding informal sector can have both structural and long-run consequences for economic activity. In terms of policy, the paper shows that recommendations regarding rural-urban migration in developing countries are sensitive to agglomeration effects.
    Date: 2011–09
  2. By: Samuel Jaramillo
    Abstract: En América Latina uno de los debates más animados y más ricos con respecto a nuestra realidad social ha sido el que se ha desarrollado a lo largo de décadas a propósito de la urbanización “espontánea”, “marginal”, “informal”, las denominaciones cambian, pero se refieren a las prácticas de hacer ciudad desarrolladas por los mismos pobladores empobrecidos y que constituyen uno de los elementos definitorios de nuestras urbes. Las interpretaciones se han sucedido unas a otras y se han contrapuesto, en ocasiones con no poca originalidad desde el punto de vista conceptual, y han estado ligadas a líneas de política que han inspirado acciones estatales concretas. El momento actual no es una excepción, con la noción liberal de “informalidad” y sus políticas asociadas de subsidios a la demanda y legalización de la tenencia que son el referente de las políticas dominantes al respecto. Lo peculiar, sin embargo es que los defensores de esta visión, y tal vez sus crítico, tienden a ignorar los antecedentes de estas discusiones y, quizás sin saberlo, repiten en versiones empobrecidas o ignoran, elementos de discusión muy valiosos que hubieran podido considerarse como conquistas conceptuales si el pensamiento sobre lo social fuera solamente acumulativo. En este texto se hace una rápida y esquemática revisión de este debate, con un propósito: enmarcar la discusión actual y precisar las referencias para desarrollar una interpretación desde la tradición marxista, que recupere estos aportes, pero que introduzca desarrollos contemporáneos ligados al desarrollo actual de este marco conceptual. Se exploran entonces nociones como la simultaneidad de prácticas de agentes heterogéneos en un mismo espacio mercantil, la articulación entre producción, circulación y consumo, de diversas formas de producción, la emergencia de rentas urbanas asociadas a prácticas mercantiles simples que la reflexión marxista de los años setenta apenas esbozaba y que hoy en día pueden ser muy fructíferas en términos de interpretación y de diseño de líneas de acción.
    Date: 2012–06–18
  3. By: Arabsheibani, Reza (Swansea University); Staneva, Anita V. (Swansea University)
    Abstract: This paper defines informal sector employment and decomposes the difference in earnings distributions between formal and informal sector employees in Tajikistan for 2007. Using the quantile regression decomposition technique proposed by Machado and Mata (2005), we find a significant informal employment wage premium across the whole earnings distribution. This contrast with earlier studies and casts doubt on the recent literature showing that the informal sector is poorly rewarded. It seems to be the case that the informal employment in Tajikistan is the main source of income.
    Keywords: formal/informal employment, quantile regression decomposition
    JEL: C14 J21 J30
    Date: 2012–07
  4. 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: Tax Havens; Multinational Firms; Tax Avoidance; Profit Shifting; Manufacturing FDI; Service FDI
    JEL: H87 F23
    Date: 2012–04
  5. By: Gianni Romani; Miguel Atienza; Ernesto Amorós
    Abstract: Funding is critical during new firms´ creation and the most sources of funding in the early stages of entrepreneurial ventures are informal investors (Family, Friends, the Founding entrepreneurs themselves, and the foolhardy strangers, also known as business angels). Entrepreneurs in the initial stages are the main users of informal financing, more specifically those denominated according to the GEM definition as nascent entrepreneurs; that is, those who are involved in establishing a business or those who have made the leap from the conception of the business to its actual gestation (Reynolds et al., 2005). Informal investment has come to the attention of researchers, mostly in the United States and Europe, and very scarcely in Latin America. Nevertheless, in recent years there has been a call to study entrepreneurship taking in consideration the perspective of gender (Brush, 1992; Bird and Brush, 2002). In Chile, studies of this nature are scarce. For this reason in order to find out more of how the nascent entrepreneurs fund theirs ventures, the main objective of this article is to explore the gender differences that could exist in the financing needs of nascent Chilean entrepreneurs with regard to: Amount needed to start the business; outside financing expectations, employment creations expectations, socio-demographic characteristics, perception related to entrepreneurship. The analysis is based on a representative sample of the Chilean adult population between 18 and 64 years of age, using data from the GEM from the years 2007 and 2008. Since this is an exploratory study, we propose separating the nascent entrepreneurs by gender and using descriptive statistics and Mann–Whitney U test (non-parametric test for two independent samples). The results show that there are significant gender differences among nascent entrepreneurs with respect to the amount needed to start a business, socio-demographic characteristics, and in some aspects related to entrepreneurship. These results provide a better understanding of the financial needs of nascent entrepreneurs and the existent differences between women and men. These results can contribute to a better design of public policies to support new venture creations taking into account a gender perspective.
    Date: 2011–09
  6. By: T√∫lio Cravo
    Abstract: An important issue facing policymakers is the degree to which fluctuations in economic activity affect employment in large and small businesses across sectors and regions. These issues are particularly relevant for developing countries, as they matter for the understanding of the labour market dynamics, and for devising regional, sectoral, and national labour policies. The unique data used in this paper was constructed using the CAGED database, which is a comprehensive administrative census dataset collected monthly by the Ministry of Labour in Brazil covering the formal sectors of the economy. Thus, monthly employment data for small and large establishments across regions and industries were constructed from 2000:1 to 2009:6 for each state and industry across the two-digit sectoral classification. This paper draws on the work of Moscarini and Postel-Vinay (2009) who analyse the correlations between measures of relative growth rate of employment by size class and business cycle conditions. As in their work, this paper uses detrended difference in employment growth rates between large and small firms as a measure of the relative performance of firms in different size bins. The evidence suggests that in Brazil small firms are more sensitive cycles, a result that contradicts Moscarini and Postel-Vinay (2009). The differential growth of employment between large and small establishments is negatively correlated with measures of business cycles, indicating that SMEs shed proportionally more jobs in recessions and gain more in booms. This pattern is also observed in most of the Brazilian States; however, there is a substantial variation in the manner the difference in employment growth rates correlates with business cycles at regional level. Besides, the sectoral analysis supports the evidence that formal small businesses are more sensitive than large ones in all sectors but in the commerce. This finding is important and might be related with the fact that the commerce sector relies heavily on informal workers that are the first ones to be hired or made redundant over the business cycles. Therefore, the evidence from this paper suggests that in a developing country context small establishments are more sensitive than large ones to business cycle conditions.
    Date: 2011–09
  7. By: Mihai Mutascu (Department of Finance, Faculty of Economics and Business Administration, West University of Timisoara, Romania)
    Abstract: The paper analyzes empirically, based on “Laffer effects”, in Romania’s case, the relationship between tax revenues (dependent variable) and tax rates (independent variables). The analysis is based on the construction of a binary choice model (Linear Probit Model) and the data set is covering the period 1999 - 2009 (first trimester), with quarterly frequency. The main results show that the two “Laffer effects” have a different probability of existence. If the government knows which the maximum probabilities are for each of the two effects, then he can construct a coherent tax policy arrangement that raise or decrease the tax revenues, based on flat or progressive tax systems (the tax evasion is considered to be constant).
    Keywords: Tax revenues, Tax rates, Laffer curve, Effects, Probability, Probit analysis
    JEL: H21 H71 E62 C35
    Date: 2012–04–10

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