nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒03‒09
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality and Macroeconomic Fluctuations: A Small Open Economy New Keynesian DSGE Model with Dual Labour Markets By Senbeta, Sisay R.
  2. Unemployment Insurance in the Presence of an Informal Sector By David Bardey; Fernando Jaramillo; Ximena Peña
  3. Unemployment Compensation and the Allocation of Labor in Developing Countries By Charlot, Olivier; Malherbet, Franck; Ulus, Mustafa
  4. Urbanization and (in)formalization By Ghani, Ejaz; Kanbur, Ravi
  5. The Origins of Social Contracts: Attitudes toward Taxation in Urban Nigeria By Cristina Bodea; Adrienne LeBas
  6. Money Laundering as a Financial Sector Crime. A New Approach to Measurement, with an Application to Italy By Guerino Ardizzi; Carmelo Petraglia; Massimiliano Piacenza; Friedrich Schneider; Gilberto Turati
  7. Housing and Urbanization in Africa: unleashing a formal market process By Paul Collier; Tony Venables
  8. Piracy in a two-sided software market By Rasch, Alexander; Wenzel, Tobias

  1. By: Senbeta, Sisay R.
    Abstract: How do key macroeconomic variables of a small open economy with segmented labour markets behave in response to domestic and external shocks? In this paper we attempt to address this question by modeling the coexistence of a formal labour market with higher wage rates and search frictions, and an informal labour market with the opposite attributes in the standard multi-sector small open economy New Keynesian DSGE model. The model is calibrated for a typical Sub-Saharan African economy and the behaviour of key macroeconomic variables in response to domestic and external shocks is analysed. The results show that almost all the impulse response functions of our model are consistent with what theory predicts and what other empirical works show about the responses of low income countries to the shocks we consider. However, our results do not seem to corroborate the widely held wisdom that the existence of an informal sector plays a stabilizing role in the event of shocks.
    Date: 2013–02
  2. By: David Bardey; Fernando Jaramillo; Ximena Peña
    Abstract: We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits and long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers’effort to secure a formal job, their labor supply in the informal sector and leisure time. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. The overall effect is ambiguous and depends on the relative strength of these two effects. Additionally, we show that an increase in UI benefits increases the efforts of long-run unemployed workers. Using data from Brazil to calibrate the parameters of the model we provide a simple simulation exercise which suggests that the income effect pointed out is not necessarily of second-order importance in comparison with moral hazard strength: An increase in UI benefits may increase unemployed workers efforts to secure a job in the formal sector, instead of increasing informal-sector work. This result softens the widespread opinion that the presence of dual labor markets is an obstacle to providing UI in developing countries.
    Date: 2013–01–22
  3. By: Charlot, Olivier (THEMA, University of Cergy-Pontoise); Malherbet, Franck (CREST, Ecole Polytechnique, IZA and fRDB); Ulus, Mustafa (Galatasaray University Economic Research Center)
    Abstract: This paper studies the effects of the introduction of unemployment compensation (UC) in countries characterized by pervasive informality. We provide a simple framework to analyze the impact of UC on the allocation of workers between formal and informal activities, as well as the allocation of workers between sectors featuring different incentives to go informal. We show that a reasonable amount of UC may reduce informality, while larger amounts of UC induce large disincentives to go formal because of the level of taxation involved. We also argue that the financing of UC should be part and parcel of a well- conceived UC system. We show that UC finance based on payroll taxes is likely to entail an excess level of informality resulting from cross-subsidies between heterogenous sectors. The introduction of a simple layoff tax meant to finance the UC system is then shown to reduce informality, hence highlighting how a well-designed financing scheme may be used as a supplementary instrument to curb informality.
    Keywords: Informality; Labor Market Imperfections; Unemployment Insurance
    JEL: E24 E26 J60 L16 O10
    Date: 2013–02–22
  4. By: Ghani, Ejaz; Kanbur, Ravi
    Abstract: Two of the great stylized predictions of development theory, and two of the great expectations of policy makers as indicators of progress in development, are inexorable urbanization and inexorable formalization. Urbanization is indeed happening, beyond the"tipping point"where half the world's population is now urban. However, formalization has slowed down significantly in the past quarter century. Indeed, informality has been increasing. This disconnect raises a number of questions for development analysis and development policy. Is the link between urbanization and formalization more complex than what had been thought? What does this mean for policy? The first core section of this paper asks what exactly is meant by formality and informality. The second core section turns to processes of urbanization and asks how these processes intersect with and interact with the incentives to formalize. The paper examines why cities attract the informal sector and the role that urbanization plays in growth and job creation through both the formal and informal sectors. Cities generate agglomeration benefits in the informal sector, perhaps more so than for the formal sector. The third core section is devoted to policy. At the current conjuncture, agglomeration benefits make a strong case for urbanization as an integral part of development strategy, but concerns about jobless growth and about urban poverty require a focus on the informal sector.
    Keywords: Population Policies,Labor Markets,Urban Slums Upgrading,Labor Policies,National Urban Development Policies&Strategies
    Date: 2013–02–01
  5. By: Cristina Bodea; Adrienne LeBas
    Abstract: How do social contracts come into being?  This paper argues that norm adoption plays an important and neglected role in this process.  Using novel data from urban Nigeria, we examine why individuals adopt norms favoring a citizen obligation to pay tax where state enforcement is weak.  We find that public goods delivery by the state produces the willingness to pay tax, but community characteristics also have a strong and independent effect on both social contract norms and actual tax payment.  Individuals are less likely to adopt pro-tax norms if they have access to community provision of security and other services.  In conflict-prone communities, where "self-help" provision of club goods is less effective, individuals are more likely to adopt social contract norms.  Finally, we show that social contract norms substantially boost tax payment.  This paper has broad implications for literatures on state formation, taxation, clientelism, and public goods provision.
    Date: 2013–01–24
  6. By: Guerino Ardizzi (Market and Payment Systems Oversight Department, Bank of Italy, Italy); Carmelo Petraglia (Department of Mathematics, Computer Science and Economics, University of Basilicata, Italy); Massimiliano Piacenza (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Friedrich Schneider (Department of Economics, Johannes Kepler University of Linz, Austria); Gilberto Turati (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: Anti–money laundering regulations have been centred on the “Know-Your-Customer” rule so far, overlooking the fact that criminal proceedings that need to be laundered are usually represented by cash. This is the first study aimed at providing an answer to the question of how much of cash deposited via an official financial institution can be traced back to criminal activities. The paper develops a new approach to measure money laundering and then proposes an application to Italy, a country where cash is still widely used in transactions and criminal activities generate significant proceeds to be laundered. In particular, we define a model of cash in-flows on current accounts and proxy money laundering with two indicators for the diffusion of criminal activities related to both illegal trafficking and extortion, controlling also for structural (legal) motivations to deposit cash, as well as the need to conceal proceeds from tax evasion. Using a panel of 91 Italian provinces observed over the period 2005-2008, we find that the amount of cash laundered is sizable, around 7% of GDP, 3/4 of which is due to illegal trafficking, while 1/4 is attributable to extortions. Furthermore, the incidence of “dirty money” coming from illegal trafficking is higher in the Centre-North than in the South, while the inverse is true for extortions. Results are useful to discuss policy initiatives to combat money laundering.
    Keywords: Money laundering, Shadow economy, Banking regulation
    JEL: K42 H26 G28
    Date: 2013–03
  7. By: Paul Collier; Tony Venables
    Abstract: In many African countries a market for private provision of formal sector mass housing is largely absent.  This is not inevitable, but is the consequence of policy failure surrounding five key issues.  The affordability of housing, with costs often inflated by inappropriate building regulations and inefficient construction sectors; lack of clarity in land titling and legal enforcement; lack of innovation in supply of housing finance; failure to supply supporting infrastructure and to capture development gains to finance this; and failure to plan cities in a manner conducive to employment creation.  Since responsibility for these policies is divided between different parts of government, a coordinated push is needed to secure reform and activate this market.
    Date: 2013–01–09
  8. By: Rasch, Alexander; Wenzel, Tobias
    Abstract: This paper studies the impact of software piracy in a two-sidedmarket setting. Software platforms attract developers and users to maximize their profits. The equilibrium price structure is affected by piracy: license fees to developers are higher with more software protection but the impact on user prices is ambiguous. A conflict between platforms and software developers over software protection may arise: whereas one side benefits from better protection, the other party loses out. Under platform compatibility, this conflict is no longer present. --
    Keywords: developer,piracy,platform,software,two-sided markets
    JEL: L11 L86
    Date: 2013

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