nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒11‒24
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Formal and informal markets: A strategic and evolutionary perspective By Anbarci, Nejat; Gomis-Porqueras, Pedro; Marcus, Pivato
  2. Tax Compliance and Psychic Costs: Behavioral Experimental Evidence Using a Physiological Marker By Uwe Dulleck; Jonas Fooken; Cameron Newton; Andrea Ristl; Markus Schaffner; Benno Torgler
  3. Fiscal illusion and the shadow economy: Two sides of the same coin? By Buehn , Andreas; Dell'Anno, Roberto; Schneider, Friedrich
  4. The Carousel Value-added Tax Fraud in the European Emission Trading System By Maria Berrittella; Filippo Alessandro Cimino
  5. Corporate Criminal Liability and Optimal Behavior by Firms.Internal Monitoring Devices versus Managerial Incentives. By Paolo Polidori; Désirée Teobaldelli
  6. Final Report on Private Sector Development in the MED-11 Region By Richard Woodward; Mehdi Safavi

  1. By: Anbarci, Nejat; Gomis-Porqueras, Pedro; Marcus, Pivato
    Abstract: We investigate the coexistence of formal and informal markets. In formal markets, we assume sellers can publicly advertise their prices and locations, whereas in informal markets, sellers need to trade through bilateral bargaining so as to remain anonymous from the taxing authority. We consider two models. As a benchmark, we first only allow sellers to switch between markets, which enables us to derive some analytical results that show the existence of a stable equilibrium where formal and informal markets coexist. We also establish that some sellers will migrate from the formal market to the informal market if the formal market's advantage in quality assurance erodes, or the government imposes higher taxes and regulations in the formal market, or the risk of crime and/or confiscation decreases in the informal market, or the number of buyers in the informal market increases. Some sellers will migrate from the informal market to the formal market whenever the opposite changes occur. We then allow both sellers and buyers to switch between markets. In this model, we illustrate that if the net costs of trading for sellers in the formal sector and buyers in the informal sector have opposite signs, then there is a unique locally stable equilibrium where formal and informal markets coexist.
    Keywords: informal markets; bilateral bargaining; directed search; taxation
    JEL: C78 E26
    Date: 2012–11–07
  2. By: Uwe Dulleck; Jonas Fooken; Cameron Newton; Andrea Ristl; Markus Schaffner; Benno Torgler
    Abstract: Although paying taxes is a key element in a well-functioning civilized society, the understanding of why people pay taxes is still limited. What current evidence shows is that, given relatively low audit probabilities and penalties in case of tax evasion, compliance levels are higher than would be predicted by traditional economics-of-crime models. Models emphasizing that taxpayers make strategic, financially motivated compliance decisions, seemingly assume an overly restrictive view of human nature. Law abidance may be more accurately explained by social norms, a concept that has gained growing importance as a facet in better understanding the tax compliance puzzle. This study analyzes the relation between psychic cost arising from breaking social norms and tax compliance using a heart rate variability (HRV) measure that captures the psychobiological or neural equivalents of psychic costs (e.g., feelings of guilt or shame) that may arise from the contemplation of real or imagined actions and produce immediate consequential physiologic discomfort. Specifically, this nonintrusive HRV measurement method obtains information on activity in two branches of the autonomous nervous system (ANS), the excitatory sympathetic nervous system and the inhibitory parasympathetic system. Using time-frequency analysis of the (interpolated) heart rate signal, it identifies the level of activity (power) at different velocities of change (frequencies), whose LF (low frequency) to HF (high frequency band) ratio can be used as an index of sympathovagal balance or psychic stress. Our results, based on a large set of observations in a laboratory setting, provide empirical evidence of a positive correlation between psychic stress and tax compliance and thus underscore the importance of moral sentiment in the tax compliance context.
    Keywords: tax compliance; psychic costs; stress; tax morale; cooperation; heart rate variability; biomarkers; experiment
    JEL: H26 H41 K42 D31 D63 C91
    Date: 2012–11
  3. By: Buehn , Andreas; Dell'Anno, Roberto; Schneider, Friedrich
    Abstract: This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy: Concealing the real tax burden through fiscal illusion potentially contributes to the government’s efforts to repress shadow economic activities.
    Keywords: Fiscal illusion; shadow economy; MIMIC model; latent variables; tax burden; tax complexity
    JEL: E62 O17 K42
    Date: 2012–11–09
  4. By: Maria Berrittella (Dipartimento di Scienze Economiche, Aziendali e Finanziarie, Università degli Studi di Palermo); Filippo Alessandro Cimino (Facoltà di Scienze Economiche e Giuridiche, Università Kore di Enna)
    Abstract: In this article, we analyse the effects of the carousel value-added tax fraud in the European carbon market and the legislative measures that the EU Member States could adopt to deal with this phenomena. We use a computable general equilibrium model, called GTAP-E and the version 6 of the GTAP database to evaluate the economy-wide and terms of trade effects. The policy test has been designed for five European countries: Belgium, France, Germany, Italy, Netherlands and the United Kingdom. According to our findings, the legislative measures aimed to remove the VAT fraud in the European Emission Trading System will have positive effects in terms of GDP and welfare in the selected EU Member States.
    Keywords: Domestic Emission Trading, General Equilibrium Analysis, Legislative Measures, Value-added Tax Fraud, Welfare
    JEL: C68 H26 K34 Q58
    Date: 2012–10
  5. By: Paolo Polidori (Department of Law, University of Urbino “Carlo Bo”); Désirée Teobaldelli (Department of Law, University of Urbino “Carlo Bo”)
    Abstract: Corporate criminal liability legislation has been the subject of a widespread debate around the world in response to the financial scandals of the early 2000s. The existing legal regimes en- tail compliance requirements, such as internal monitoring mechanisms, with the aim of inducing firms to detect the wrongful conduct of their agents. We develop an analytical framework to address when and to what extent firms may find convenient to adopt these regulatory devices. We conclude that more productive firms and those operating in sectors where managers have more opportunities to undertake criminal activities are more likely to prevent such activities (through monitoring or the payment of e¢ ciency wages). When the potential returns of ille- gal activities are high or when the firms are large, implementing internal monitoring devices may be optimal, while smaller firms should generally prefer the payment of efficiency wages to prevent crimes by managers.
    Keywords: Corporate Governance, Law Enforcement, Compliance, Deterrence, Regulation.
    JEL: K22 K42 G34 G38 L50
    Date: 2012
  6. By: Richard Woodward; Mehdi Safavi
    Abstract: This report is concerned with the analysis of privatization and private sector development for the eastern and southern Mediterranean countries partnered with the European Union and collectively known as MED-11. Noting that the analysis applies to the situation prior to the dislocations of the Arab Spring, we review the shift in the relative shares of the public and private sectors in these countries, as well as the business climate affecting the development of the private sector, examine a number of cultural factors that may influence the development of the private sector, and discuss some alternative scenarios for future developments. In the last 20 years, efforts have been made in all countries of the MED-11 to encourage private sector development and, to a greater or lesser extent, privatization of stateowned assets. However, there is a great deal of differentiation among the countries in the group. In the MED-11, Israel has not only the most business-friendly policy environment but also the most developed private sector, accounting for almost 80% of employment. The other countries of the region can be divided into two groups: one, including Algeria, Libya, and Syria, where reforms promoting privatization and private sector development have been very limited, and the rest, in which they have been much more extensive (the Palestine Authority is, for obvious reasons, a rather special case). A generally poor business environment makes for a large informal sector in almost every country in the region; however, generally speaking, we do not find the cultural factors we examine to be hostile to private sector development. Optimistic, reference and pessimistic scenarios are discussed; which of these is realized in any particular MED-11 country will depend greatly on the direction of change following the events of 2011’s Arab Spring.
    Keywords: Private Sector, Privatization, Business Climate, Middle East, North Africa
    JEL: L32 L33 L50 O16 O17 P33
    Date: 2012–10

This nep-iue issue is ©2012 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.