nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒10‒20
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Shadow Economies in Highly Developed OECD Countries: What Are the Driving Forces? By Schneider, Friedrich; Buehn, Andreas
  2. Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation By Lichard, Tomáš; Hanousek, Jan; Filer, Randall K.
  3. Wages and informality in developing countries. By Costas Meghir; Renata Narita; Jean-Marc Robin
  4. (In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico By Matias Busso; Maria Victoria Fazio; Santiago Levy Algazi
  5. Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes By Eduardo Lora; Deisy Johanna Fajardo
  6. More than Revenue: Main Challenges for Taxation in Latin America and the Caribbean By Teresa Ter-Minassian
  7. Entrepreneurship, Entrepreneurial Values, and Public Policy in Argentina By Jose Anchorena; Lucas Ronconi
  8. Intergenerational Mobility and Income Effects for Entrepreneurial Activity in Mexico By Viviana Velez-Grajales; Roberto Velez-Grajales
  9. Private and Public Control of Management By Charles Angelucci; Martijn A. Han; ;
  10. Financing from Family and Friends By Lee, Samuel; Persson, Petra
  11. Structural Reforms to Boost Turkey's Long-Term Growth By Rauf Gönenç; Oliver Röhn; Vincent Koen; Şeref Saygili
  12. El mercado laboral y el problema pensional colombiano By Hugo López Castaño; Francisco Lasso Valderrama

  1. By: Schneider, Friedrich (University of Linz); Buehn, Andreas (Utrecht University)
    Abstract: In this paper the main focus lies on 'driving forces' of the development and size of the shadow economy in highly developed 39 OECD countries. The influential factors on the shadow economy are tax policies and state regulation, which, if they rise, increase the shadow economy, but also other factors like economic ones (unemployment) are considered, too. Specifically it is shown that the main driving forces are unemployment, self-employment and the tax burden, which have different weights in these 39 countries. Between 1999 and 2010 indirect taxes have by far the largest relative impact (29.4%), followed by self-employment (22.2%), unemployment (16.9%), personal income taxes (13.1%) and tax morale (9.5%).
    Keywords: state regulation, tax pressure, tax morale, shadow economy, undeclared work
    JEL: K42 H26 D78
    Date: 2012–10
  2. By: Lichard, Tomáš (CERGE-EI); Hanousek, Jan (CERGE-EI); Filer, Randall K. (Hunter College/CUNY)
    Abstract: We develop an estimator of unreported income, perhaps due to tax evasion, that does not depend on as strict identifying assumptions as previous estimators based on microeconomic data. The standard identifying assumption that the self-employed underreport income whereas wage and salary workers do not is likely to fail in countries where employees are often paid under the table or engage in corrupt activities. Assuming that evading individuals have a higher consumption-income gap than non-evading ones due underreporting both to tax authorities and in surveys, an endogenous switching model with unknown sample separation enables the estimation of consumption-income gaps for both underreporting and truthful households. This avoids the need to identify non-evading and evading groups ex-ante. This methodology is applied to data from Czech and Slovak household budget surveys and shows that estimated evasion is substantially higher than found using previous methodologies.
    Keywords: shadow economy, switch regression, income-consumption gap
    JEL: C34 E01 H26 J39
    Date: 2012–10
  3. By: Costas Meghir (Institute for Fiscal Studies and Yale University); Renata Narita; Jean-Marc Robin (Institute for Fiscal Studies and Sciences Po)
    Abstract: It is often argued that informal labor markets in developing countries promote growth by reducing the impact of regulation. On the other hand informality may reduce the amount of social protection offered to workers. We extend the wage-posting framework of Burdett and Mortensen (1998) to allow heterogeneous firms to decide whether to locate in the formal or the informal sector, as well as set wages. Workers engage in both off the job and on the job search. We estimate the model using Brazilian micro data and evaluate the labor market and welfare effects of policies towards informality.
    Keywords: Wages, informality, developing countries
    Date: 2012–09
  4. By: Matias Busso; Maria Victoria Fazio; Santiago Levy Algazi
    Abstract: The laws that regulate relations between firms and workers in Mexico distinguish sharply between salaried and non-salaried workers, and they are at the root of the existence of informality. This paper provides a clear definition of informality, distinguishing it from illegality. Using Mexico’s Economic Census, the paper shows that the majority of firms are informal but legal, that there are more small formal firms than large ones, and that some large firms are informal. It also shows that informality and illegality increased in the period 1998-2008. Using a simple model of monopolistic competition to measure the productivity losses due to distortions that misallocate resources, the paper finds that one peso of capital and labor allocated to formal and legal firms is worth 28 percent more than if allocated to illegal and informal firms, and 50 percent more than if allocated to legal and informal firms. The paper concludes arguing that the distortions in the labor market created by informality reduce total factor productivity.
    JEL: D24 L25 O47
    Date: 2012–08
  5. By: Eduardo Lora; Deisy Johanna Fajardo
    Abstract: This paper empirically explores the effects of payroll taxes, value-added taxes and corporate income taxes on a variety of labor market outcomes such as employment, unemployment, informality, and wages. Using national-level data on labor variables for 15 Latin American countries, the results indicate that the effects of each tax are distinctly different and may depend on several aspects of labor and tax institutions. Payroll taxes reduce employment and increase labor costs when their benefits are not valued by workers, but otherwise increase labor participation and do not raise labor costs. Value-added taxes increase informality and reduce skilled labor demand. In contrast, corporate income taxes may help reduce informality, especially among low-education workers but, when tax enforcement capabilities are strong, may reduce labor participation and employment of medium- and high-education workers.
    JEL: H24 H25 J21 J30 J32
    Date: 2012–09
  6. By: Teresa Ter-Minassian
    Abstract: This paper aims to provide an overview of the current state of taxation in the Latin America and Caribbean (LAC) region, and its main reform needs and options. It previews the findings of recent studies prepared or commissioned by the Inter-American Development Bank (IDB) for its forthcoming flagship publication More than Revenue: Taxation as a Development Tool in the -Development in the Americas- series. Reflecting fiscal consolidation imperatives, the main objective of fiscal policies in the region in recent decades has been revenue mobilization, often at the expense of efficiency and equity objectives. This paper analyzes the region’s taxation in regard to revenue adequacy, efficiency, vertical and horizontal equity, ease of administration and compliance, and degree of fiscal decentralization, concluding that there is significant scope for reforms that would result in simultaneous improvement on several of these fronts. Although the paper does not provide a specific blueprint for reforms, which would need to be designed on a country-by-country basis, it identifies directions for reform that are relevant for most of the region.
    JEL: H20 H21 H22 H23 H24 H25 H26
    Date: 2012–09
  7. By: Jose Anchorena; Lucas Ronconi
    Abstract: This paper uses datasets from six surveys to describe entrepreneurship in Argentina. While the quantity of entrepreneurship in Argentina is high, its quality is low, given the high proportion of informal and necessity entrepreneurs. Income is found to play a greater role in determining probability of becoming an entrepreneur than parental wealth; entrepreneurship is, however, transmitted inter- generationally. Although it is found that Argentina promotes entrepreneurial values more than most Latin American countries, entrepreneurs face several obstacles. Finally, using panel data based on household surveys, the paper estimates the short and long-run effects of an increase in public employment on entrepreneurship, finding the effects to be negative and strong. Overall, the evidence suggests that changes in public policies and other areas are needed for Argentina to become an entrepreneurial economy.
    JEL: L26 L5 O17
    Date: 2012–07
  8. By: Viviana Velez-Grajales; Roberto Velez-Grajales
    Abstract: This paper uses the Mexican Social Mobility Survey 2006 to analyze intergenerational social mobility as it relates to entrepreneurial activity. First, the paper analyzes whether entrepreneurs experience greater upward social mobility than self-employed workers or employees. Second, probit models are estimated to identify whether predetermined characteristics are the main determinants of the decision to become an entrepreneur. Third, using the propensity score matching method (PSM), the paper estimates the effect of entrepreneurial activity on income. Results show that entrepreneurs have more options for upward social mobility. For entrepreneurs with low-income parents, it is more difficult to reach the top of the socioeconomic distribution compared to those with middle- or upper-class parents. Second, the probability of becoming an entrepreneur increases when the respondent’s father was an entrepreneur. Finally, the mean effect of entrepreneurial activity on income is positive, and is greater for those whose parents belonged to the extreme ends of the socioeconomic distribution.
    JEL: C21 J62 L26
    Date: 2012–07
  9. By: Charles Angelucci; Martijn A. Han; ;
    Abstract: This paper investigates the design of a leniency policy to fight corporate crime. We explicitly take into account the agency problem within the firm. We model this through a three-tier hierarchy: authority, shareholder, and manager. The manager may breach the law and report evidence to the authority. The shareholder writes the manager’s incentive scheme, monitors him, and possibly reports evidence to the authority. Finally, the authority designs a sanctioning/leniency policy that deters corporate crime at the lowest possible cost. The authority designs its policy trying to both (i) exacerbate agency problems within non-compliant firms and (ii) alleviate agency problems within compliant firms. We find that depending on the authority’s ability to punish the manager, the authority may wish to instigate a “within-firm race to the courthouse”. We also provide comparative statics, carry a welfare analysis and discuss policy implications.
    Keywords: corporate crime, white-collar crime, leniency, compliance, antitrust
    JEL: K21 K42 L40
    Date: 2012–10
  10. By: Lee, Samuel (Stern School of Business); Persson, Petra (Research Institute of Industrial Economics (IFN))
    Abstract: The constraint on informal finance is commonly taken to be high costs and limited supply. But the majority of informal investors – family and friends – is often willing to supply funds at negative returns, and yet many borrowers tap family and friends only as a last resort. We explain this paradox with a theory based on altruistic ties between the entrepreneur and his family and friends, and propose an alternative explanation of the limits of informal finance: Altruistic ties reduce agency problems in financing. But such ties also increase the entrepreneur’s aversion to failure. This makes financing from family and friends unattractive, and undermines the entrepreneur’s willingness to take risks. Altruistic ties thus constrain growth even though they relax financing constraints. We relate this insight to the limited success of group-based microfinance in generating entrepreneurial growth. Our theory underscores the value of impersonal transactions, and implies that even counterparties with social ties benefit from formal contracts and third-party intermediation. This sheds light on social-formal financial institutions, such as community funds, crowd funding, and social lending intermediaries.
    Keywords: Informal finance; Family loans; Social ties; Altruism; Peer-to-peer lending; Small business;
    JEL: D19 D64 G21 G32 O16 O17
    Date: 2012–10–11
  11. By: Rauf Gönenç; Oliver Röhn; Vincent Koen; Şeref Saygili
    Abstract: Turkey can achieve strong sustainable growth and job creation but further reforms in the labour market, education and product markets are required for such gains to materialise. In recent years, growth has been largely driven by the industrial catch-up of Anatolian regions, although the Marmara area in the West has also been very dynamic. In the process, labour force participation has started to rise anew, but around one third of new low-skilled jobs have been created in the informal sector. Sustaining vigorous growth over the longer run therefore requires pushing ahead with a number of structural reforms. First, Turkey’s rigid labour market regulation needs to evolve, so as to encourage job creation in the formal sector. Second, further progress with education reform, from pre-school all the way to the tertiary level and vocational training, is needed to boost growth and bring about employment gains in the formal sector. Third, implementing product market reforms, notably in network industries, would unleash productivity gains in those sectors and be a boost to the rest of the economy. A set of alternative growth scenarios through 2030 illustrates how progress on these various fronts can deliver lasting improvements in living standards. This Working Paper relates to the 2012 OECD Economic Survey of Turkey (<P>Des réformes structurelles pour stimuler la croissance à long terme en Turquie<BR>La Turquie a les moyens d’une croissance rapide et durable riche en emplois, mais des réformes s’imposent en matière de – marché du travail, d’éducation et de marchés de produits –pour que ce potentiel se concrétise. Le rattrapage industriel des régions d’Anatolie a largement tiré la croissance de ces dernières années, même si la région de Marmara, à l’ouest, a elle aussi été très dynamique. Accompagnant ce processus, la participation au marché du travail est repartie à la hausse, mais environ un tiers des nouveaux emplois peu qualifiés ont été créés dans l’économie informelle. Maintenir un rythme de croissance vigoureux sur longue période nécessite donc de faire avancer un certain nombre de réformes structurelles. Tout d’abord, la réglementation du marché du travail, rigide, doit évoluer de façon à encourager la création d’emplois dans l’économie formelle. Ensuite, il faut aller plus loin encore dans les réformes de l’éducation, de l’enseignement préscolaire à l’enseignement supérieur et à la formation professionnelle, pour dynamiser la croissance et favoriser les créations d’emplois dans le secteur formel. Enfin, la mise en oeuvre de réformes des marchés de produits, notamment dans les industries de réseau, devrait permettre de libérer des gains de productivité dans ces secteurs et insuffler une dynamique au reste de l’économie. Différents scénarios de croissance à l’horizon 2030 montrent comment les avancées sur ces différents fronts peuvent engendrer une amélioration durable du niveau de vie. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Turquie, 2012 (
    Keywords: growth, employment protection legislation, productivity, competition, education, Turkey, informality, labour market, législation sur la protection de l'emploi, productivité, croissance, marché du travail, éducation, concurrence, Turquie, informalité
    JEL: H11 I25 J2 J3 J41 J65 O11 O15 O17 O18 O4 O52
    Date: 2012–09–13
  12. By: Hugo López Castaño; Francisco Lasso Valderrama
    Abstract: Este artículo examina el problema que plantea la cobertura pensional de los colombianos menos educados y más vulnerables. Relaciona las tendencias del mercado laboral con la baja cobertura pensional: el sesgo del empleo urbano moderno contra los menos educados ha generado para estos un ciclo de vida laboral muy marcado (empleo asalariado para los jóvenes, informal para los adultos): durante su fase asalariada temprana perciben ingresos relativamente mejores y, salvo en los períodos de desempleo, cotizan más al sistema pensional; durante su fase madura como informales perciben ingresos más bajos y dejan de cotizar. Ello, junto con la bajísima calidad del empleo rural, explica la baja cobertura pensional. Hemos diseñado un modelo para estimar el futuro laboral y pensional de cada uno de los 167.304 individuos en edad de trabajar existentes en la muestra de la encuesta nacional de hogares del DANE del tercer trimestre de 2007. Para ello ha sido necesario calcular su supervivencia hasta los 65 años, las probabilidades anuales de transición entre asalariados, no asalariados, desempleados e inactivos, por edades simples, sexo y nivel educativo y también, con base en la información de esa encuesta de hogares, las semanas y sumas monetarias cotizadas por cada uno. Dados los resultados (solo los más educados podrán pensionarse en proporciones significativas, los menos educados no) y con el fin de elevar la cobertura para estos últimos, hemos considerado una serie de modificaciones al mercado laboral colombiano y examinado también los impactos de la pensión familiar. Los resultados, que son bastante decepcionantes (la cobertura no sube mucho ni bajo el régimen de capitalización, ni bajo el de prima media a menos que este último se deficite peligrosamente), revelan que, aunque la densidad de cotizaciones se eleva significativamente y los salarios de los obreros y empleados suben cuando se formaliza en el empleo asalariado, resultan insuficientes dados los bajísimos ingresos de los trabajadores informales; sin embargo, bajo el régimen de capitalización y excluyendo la garantía de pensión mínima, el escenario más optimista (que incluye un alza del 50% en la educación superior) mejora sustancialmente la cobertura pensional global; lo hace al garantizar a la población empleos de altos salarios y con mayores densidades de cotización. Por eso, el artículo se ocupa también finalmente de los impactos de los beneficios económicos periódicos sobre las posibilidades pensionales de la población menos educada.
    Date: 2012–10–02

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