nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒04‒13
seventeen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. 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
  2. Tax Morale, Tax Compliance and the Optimal Tax Policy By Gaetano Lisi
  3. Tax evasion, financial development and inflation: theory and empirical evidence By Manoel Bittencourt; Rangan Gupta; Lardo Stander
  4. Deception detection and the role of self-selection By Konrad, Kai A.; Lohse, Tim; Qari, Salmai
  5. Informality and Overeducation in the Labor Market of a Developing Country By Paula Herrera-Idárraga; Enrique López-Bazo; Elisabet Motellón
  6. Happy in the Informal Economy? A Case Study of Well-Being Among Day Labourers in South Africa By PF Blaauw, I Botha, R Schenck and C Schoeman
  7. Petroleum product pricing and complementary policies: experience of 65 developing countries since 2009 By Kojima, Masami
  8. The Political Economy of Rural Property Rights and the Persistence of the Dual Economy By Fergusson, Leopoldo
  9. Current Account Reversals and Structural Change in Developing and Industrialized Countries By William D. Craighead; David R. Hineline
  10. Non-traded Factor Appreciation in China By Gordon Menzies; Xiaolin Xiao
  11. Income Inequality and Poverty in Colombia - Part 1. The Role of the Labour Market By Isabelle Joumard; Juliana Londoño Vélez
  12. Income Inequality and Poverty in Colombia - Part 2. The Redistributive Impact of Taxes and Transfers By Isabelle Joumard; Juliana Londoño Vélez
  13. Fighting Discrimination: W. Arthur Lewis and the Dual Economy of Manchester in the 1950s By Paul Mosley; Barbara Ingham
  14. Improving Employment Prospects for Young Workers in Spain By Anita Wölfl
  15. The impact of mobile phone penetration on African inequality By Asongu, Simplice A
  16. Music Piracy: Bad for Record Sales but Good for the iPod? By Leung, Tin Cheuk
  17. ¿El triunfo de Bogotá?: desempeño reciente de la ciudad capital By Luis Armando Galvis

  1. By: Uwe Dulleck (QUT); Jonas Fooken (QUT); Cameron Newton (QUT); Andrea Ristl; Markus Schaffner (QUT); Benno Torgler (QUT)
    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: 2012–11–07
  2. By: Gaetano Lisi (Creativity and Motivations (CreaM) Economic Research Centre)
    Abstract: Following the behavioural branch of tax compliance literature, this paper tries to incorporate tax morale into the optimal taxation theory. We show that tax morale affects the optimal mix of policy tools of deterrence to clamp down tax evasion. The optimal tax policy in fact differs according to the type of tax payer taken into account. Precisely, in the case of honest taxpayers the optimal strategy from a social welfare standpoint is to substitute a higher taxation/penalty with tighter monitoring; whereas, in the case of tax evaders, the policy maker should enforce both a higher penalty and an increased monitoring
    Keywords: tax evasion, tax compliance, tax morale, taxation, monitoring JEL
    JEL: H26 J64 K42
    Date: 2013–04
  3. By: Manoel Bittencourt (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Lardo Stander (Department of Economics, University of Pretoria)
    Abstract: Using a standard overlapping generations monetary production economy, faced with endogenously determined tax evasion by heterogeneous agents in the economy, we provide a theoretical model that indicates that both a lower (higher) level of financial development and a higher (lower) level of in flation leads to a bigger (smaller) shadow economy. These findings are empirically tested within a panel econometric framework, using data collected for 150 countries over the period 1980-2009 to enable a broad generalisation of the results. The results support the developed theoretical model, even after having accounted for the differences in the levels of economic development, the level of institutional quality that includes different tax regimes and regulatory frameworks, central bank participation in the economy as well as different macroeconomic policies.
    Keywords: Informal economy, financial development, in flation
    JEL: C61 E26 P16
    Date: 2013–03
  4. By: Konrad, Kai A.; Lohse, Tim; Qari, Salmai
    Abstract: We consider a lie-catching experiment with 9240 judgements. A set of videotapes shows subjects participating in a tax compliance experiment. The subjects chose whether or not to misreport. Subjects knew that underreporters were chosen for an audit with some probability. An audit led to detection and to a punishment fee. This compliance framework induced only persons with high deceptive abilities to underreport and, so, caused self-selection. Among the students who judged these videos, we find that the deception detection rate was significantly below 50 percent and even lower if the self-selection pressure in the tax compliance experiment was higher. This suggests that, when subjects can choose whether to state the truth or to lie, there is a self-selection effect by which individuals with higher deceptive ability are more likely to lie.
    Keywords: Decision making; Interpersonal interaction; Judgment; Perception
    JEL: D83 H26
    Date: 2013–03
  5. By: Paula Herrera-Idárraga; Enrique López-Bazo; Elisabet Motellón
    Abstract: In this paper, we explore the connection between labor market segmentation in two sectors, a modern protected formal sector and a traditional- unprotected-informal sector, and overeducation in a developing country. Informality is thought to have negative consequences, primarily through poorer working conditions, lack of social security, as well as low levels of productivity throughout the economy. This paper considers an aspect that has not been previously addressed, namely the fact that informality might also affect the way workers match their actual education with that required performing their job. We use micro-data from Colombia to test the relationship between overeducation and informality. Empirical results suggest that, once the endogeneity of employment choice has been accounted for, formal male workers are less likely to be overeducated. Interestingly, the propensity of being overeducated among women does not seem to be closely related to the sector choice.
    Date: 2013–01–06
  6. By: PF Blaauw, I Botha, R Schenck and C Schoeman
    Abstract: Past research provided evidence of the negative effect that individual unemployment can have on subjective well-being. The persistent high levels of unemployment and poverty in South Africa have been well documented. Many people are forced into the informal economy, where they engage in a variety of survivalist activities such as day labouring. As no previous study has been conducted on the well-being of day labourers, the aim of this paper is to investigate the determinants of the well-being of South African day labourers. Objective and subjective functions are compared to determine the role of income and other variables in the well-being of day labourers. The determinants are categorised according to economic, comparison and attitudinal variables. The objective function uses income and the subjective function uses the binary measure of ‘experiencing a good week in terms of wages’ as dependent variables. The results showed that comparison variables are important determinants for the subjective measure of well-being, and attitudinal variables are important for the objective measure of well-being. The economic variables were important in both functions. The findings of this paper confirm other research findings showing that personal income is important for well-being in a poor community. The difference between these functions indicates that the subjective and objective measures of well-being both capture valuable characteristics of SWB in a poor community.
    Keywords: Day labouring, Well-being, Happiness, Informal economy
    JEL: J21 J24
    Date: 2013
  7. By: Kojima, Masami
    Abstract: Unable to cope fully with steadily climbing world oil prices since mid-2009, many of the 65 countries reviewed in this paper have progressed slowly or even reversed course in reforming pricing of petroleum products. End-user prices in July 2012 varied by two orders of magnitude across the countries. More than two-fifths, including some that had only recently adopted automatic pricing mechanisms, froze the prices of gasoline, diesel, or both for months or even years on end during the study period. When the prices were finally adjusted, the increases were sometimes substantial, leading to large-scale protests, partial or full reversals of price adjustments, or softening of pricing reform policy. Governments'attempts to keep domestic prices artificially low -- through price control, export or quantity restrictions, or political pressure put on oil companies -- have helped curb inflation in the short term, but frequently with serious negative consequences: flourishing black markets, smuggling, fuel adulteration, illegal diversion of subsidy funds, large financial losses suffered by fuel suppliers, deteriorating refining and other infrastructure, and acute fuel shortages causing economy-wide damage. In several countries, subsidies, price controls, and other restrictions have helped protect inefficient refineries and oil marketers. Mitigation responses have included fuel conservation programs; fuel diversification, particularly liquid biofuels to substitute gasoline and diesel; and efforts to lower costs of supply, including strengthening infrastructure, promoting price competition, hedging, negotiating price discounts with exporters, and bulk procurement. Various forms of assistance to consumers have also been offered, especially to households, agriculture, transport, and fisheries.
    Keywords: Energy Production and Transportation,Markets and Market Access,Transport Economics Policy&Planning,Oil Refining&Gas Industry,Access to Markets
    Date: 2013–04–01
  8. By: Fergusson, Leopoldo
    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.
    Keywords: Political economy, institutions, economic development, taxation, property rights, land, dualism, Political Economy, H2, N10, O1, O10, P16,
    Date: 2012–06
  9. By: William D. Craighead (Department of Economics, Wesleyan University); David R. Hineline
    Abstract: This paper examines the compositional changes that occur in economies experiencing current account reversals using sectoral-level data on output and employment growth around 55 reversal episodes. The experiences of developing and industrialized countries are compared, and the role of currency crises is also examined. Labor market adjustments following reversals is developing countries is shown to differ from that of industrialized economies. The possibility that this difference is related to labor market informality is briefly examined.
    JEL: F3 F4
    Date: 2013–03
  10. By: Gordon Menzies (Economics Discipline Group, University of Technology, Sydney); Xiaolin Xiao (Economics Discipline Group, University of Technology, Sydney)
    Abstract: The departure of a factor in excess supply in the non-traded sector leads to a real appreciation, in a setup that combines the canonical Lewis Model (Lewis, 1954, and Fei and Ranis, 1961, 1964) with a Balassa-Samuelson traded/non-traded dichotomy (Obstfeld and Rogoff, 1996). China is a potential candidate for non-traded factor appreciation, since it has not completed its structural transformation. A transfer of rural labor to urban areas will appreciate the real exchange rate.
    Keywords: Non-traded factor appreciation; Lewis Dual-economy; China
    JEL: F21 F31 F41
    Date: 2012–09–01
  11. By: Isabelle Joumard; Juliana Londoño Vélez
    Abstract: Income inequality in Colombia has declined since the early 2000s but remains very high by international standards. Income dispersion largely originates from the labour market, which is characterised by a still high unemployment rate, a pervasive informal sector and a wide wage dispersion reflecting a large education premium for those with higher education. Reducing income inequality is a key government objective and this requires improving the performance of the labour market. Raising educational outcomes for all and enhancing training programmes would help improve labour supply and productivity. Formal job creation however remains heavily constrained by restrictive labour market regulations, in particular very substantial non-wage labour costs and a minimum wage which is high compared to average incomes. The 2012 tax reform reduces non-wage labour costs but more decisive steps are needed to create the right conditions and incentives to boost formal employment.<P>Inégalités de revenu et pauvreté en Colombie - Partie 1. Le role du marché de travail<BR>Les inégalités de revenu se sont atténuées depuis le début des années 2000 mais elles restent beaucoup plus fortes que dans la plupart des autres pays. La situation sur le marché du travail explique dans une large mesure ces inégalités, avec un taux de chômage qui reste élevé, un vaste secteur informel et d'amples écarts de salaires révélant un très net avantage pour ceux qui ont fait des études supérieures. La réduction des inégalités de revenu est un objectif important du gouvernement. Pour l'atteindre, il est nécessaire d'améliorer les performances du marché du travail. Réformer le système éducatif pour garantir un meilleur niveau de connaissances pour tous et améliorer la formation professionnelle contribueraient à améliorer l'offre de main d'oeuvre et la productivité. La création d'emplois dans le secteur formel reste néanmoins fortement entravée par des réglementations du travail restrictives, en particulier des coûts non-salariaux particulièrement importants et un salaire minimum qui est élevé par rapport aux revenus moyens. La réforme fiscale de 2012 réduit les coûts non-salariaux mais des mesures plus ambitieuses sont nécessaires pour créer des conditions and incitations plus favorables à la création d'emplois dans le secteur formel.
    Keywords: education, poverty, Colombia, informal economy, inequality, labour taxes, gender discrimination, éducation, pauvreté, Colombie, économie informelle, inégalités, impôts sur le travail, discrimination des femmes
    JEL: H23 H52 I24 I3 I32 J16 J2 J3 O17 O5
    Date: 2013–03–27
  12. By: Isabelle Joumard; Juliana Londoño Vélez
    Abstract: Income inequality in Colombia has declined since the early 2000s but remains very high by international standards. While most of the inequality originates from the labour market, wealth – and thus capital income – is also highly concentrated and the tax and transfer system has little redistributive impact. The tax-to-GDP ratio remains low. Consumption taxes, which tend to be regressive, account for the bulk. The progressivity of income taxes had been undermined by generous tax reliefs, which benefit the well-off most and increase tax avoidance opportunities. The tax system should be reformed to enhance progressivity and raise more revenue which could be used to expand social policies. Cash transfers to households are small and dominated by non-redistributive schemes such as contributory pensions. Education coverage has increased steadily but quality and equity in access at the tertiary level remain important issues. Though significant progress has been made towards universal health coverage, the financing and organisation of the health care system could be improved to raise the quality of care and reduce adverse incentives to remain in the informal sector.<P>Inégalités de revenu et pauvreté en Colombie - Partie 2. L'impact redistributif des impôts et prestations sociales<BR>Les inégalités de revenu se sont atténuées depuis le début des années 2000 mais elles restent beaucoup plus fortes que dans la plupart des autres pays. Si le fonctionnement du marché du travail est le principal facteur à l'origine de ces inégalités, il convient de noter que la richesse – et donc les revenus du capital – est aussi très inégalement répartie alors que les impôts et prestations sociales n'ont qu'un faible impact redistributif. Le montant des prélèvements obligatoires en pourcentage du PIB reste faible. Les taxes sur la consommation, qui tendent à être régressives, ont un poids prépondérant. La progressivité des impôts sur le revenu est amoindrie par les dispositifs d'allègements qui bénéficient aux plus fortunés et favorisent l'évasion fiscale. Le système fiscal devrait être réformé afin de renforcer sa progressivité et d'augmenter les recettes qui pourraient être utilisées pour mettre en place des politiques sociales plus ambitieuses. Les prestations sociales sont peu élevées et dominées par des programmes non-redistributifs, en particulier les pensions contributives. Les taux de scolarisation ont augmenté mais la qualité de l'éducation et l'équité d'accès, en particulier pour l'université, restent des défis importants. De même pour la santé, si des progrès remarquables ont été faits concernant la couverture, rendue presque universelle, le financement et l'organisation du système de santé pourraient être réformés afin d'augmenter la qualité des soins et de réduire les incitations au travail informel.
    Keywords: health, education, pensions, property tax, Colombia, value added tax, personal income tax, inequality, conditional cash transfers, water and electricity subsidies, santé, éducation, pensions, impôt sur le revenu, Colombie, impôt sur la propriété, inégalités, prestations sociales conditionnelles, subventions pour l'eau et l'électricité, impôt sur la valeur ajoutée
    JEL: H23 H24 H31 H4 H51 H53 H55 I14 I24 I38
    Date: 2013–03–27
  13. By: Paul Mosley (Department of Economics, The University of Sheffield); Barbara Ingham
    Abstract: We document, for the first time, the institution-building activities of the development economist W.Arthur Lewis (1915-1991) as founder of Community House and the South Hulme Evening Centre, two further education centres which sought to fight discrimination against the Afro-Caribbean communities of Manchester in the 1950s. We depict the struggle by Afro-Caribbeans to achieve a decent standard of living (and to escape from the ‘subsistence economy’ which provides the basis for Lewis’ most famous model) as a game of snakes and ladders in which the two main potential ladders out of poverty are first, the ability to generate nonwage income through self-employment and second, ‘vertical social capital’, i.e. membership of social networks of a kind which gave the employee the ability to fight back against discrimination. The most imaginative aspect of Lewis’s design for his further education centres is his incorporation of activities which build vertical social capital alongside conventional vocational training. Using a bargaining model to understand the ability of Afro-Caribbeans to resist discrimination, we find that Lewis’ social centres had a significant positive impact on Afro-Caribbean income and poverty levels. Through a merger between Community House and the West Indian Sports and Social Club, Lewis helped to create an innovative institution which has endured through to the present.
    Keywords: Sir Arthur Lewis(1915-1991), Manchester, racial discrimination, inner cities
    JEL: N34 O10 J71
    Date: 2013
  14. By: Anita Wölfl
    Abstract: The unemployment rate among young people has reached painfully high levels, in particular among those young people with low levels of education. There are two crucial policy priorities to improve employment prospects for youth in Spain. First, in the very short term, there is need for quick action to target welldesigned active labour market programmes to the most disadvantaged youth and provide more job-search assistance and guidance for all youth experiencing difficulties in finding a job in the current labour market. Second, the current crisis is an opportunity to tackle some of the structural weaknesses in the Spanish youth labour market. This implies in particular reforms to prevent youth from dropping out of education at a very early stage and to improve the school to work transition of young people. Key issues are to better match skills acquired in education to those asked for by businesses, as well as to establish an effective system of vocational education, and to reduce remaining demand side barriers, notably labour market duality and a rigid collective bargaining system, which both have prevented an efficient allocation of labour resources in the past and a flexible adjustment during the crisis. This Working Paper relates to the 2012 OECD Economic Survey of Spain (<P>Améliorer les perspectives d'emploi des jeunes actifs en Espagne<BR>Le taux de chômage des jeunes atteint des niveaux douloureusement élevés, notamment chez les jeunes peu qualifiés. Deux actions prioritaires sont essentielles pour améliorer les perspectives d’emploi des jeunes en Espagne. En premier lieu, et à très court terme, il faut prendre des mesures actives du marché du travail spécialement conçues pour les jeunes qui ont le plus de difficultés et offrir à tous les jeunes qui ont du mal à trouver un travail une aide plus efficace à la recherche d’emploi. Deuxièmement, la crise actuelle peut être l’occasion de corriger certaines des faiblesses structurelles du marché du travail des jeunes en Espagne. En particulier, il est essentiel d’engager des réformes visant à empêcher les jeunes de quitter l’école trop tôt et facilitant le passage à la vie active. Plusieurs difficultés doivent être surmontées : faire mieux correspondre les compétences acquises à l’école et celles demandées par les entreprises, établir un système d’enseignement professionnel efficace et réduire les obstacles qui subsistent du côté de la demande, notamment le dualisme du marché du travail et la rigidité du système de négociation collective, qui ont empêché une répartition efficace des ressources de main-d’oeuvre par le passé et un ajustement souple face à la crise. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de l’Espagne, 2012 (
    Keywords: employment protection legislation, Spain, wage bargaining, skills, vocational education, labour market, education systems, youth unemployment, dual labour market, marché du travail, Espagne, dualisme, négociation salariale, formation professionnelle, système scolaire, législation pour la protection de l’emploi, taux de chômage des jeunes, compétences
    JEL: I20 I21 I22 I23 J20 J24 J52 J65 J68
    Date: 2013–03–27
  15. By: Asongu, Simplice A
    Abstract: The aim of this paper is to complement theoretical and qualitative literature with empirical evidence on the income-redistributive effect of mobile phone penetration in 52 African countries. It deviates from mainstream country-specific and microeconomic survey-based approaches in the literature and provides the first macroeconomic assessment of the ‘mobile phone’-inequality nexus. The findings suggest that mobile penetration is pro-poor, as it has a positive income equality effect. ‘Mobile phone’-oriented poverty reduction channels are discussed.
    Keywords: Mobile Phones; Shadow Economy; Poverty; Inequality; Africa
    JEL: E00 G20 I30 L9 L96 O33 O55
    Date: 2012–08–31
  16. By: Leung, Tin Cheuk
    Abstract: Music piracy is a double-edged sword for the music industry. On the one hand, it hurts record sales. On the other hand, it increases sales of its complements. To quantify the effect of music piracy, I construct a unique survey data set and use a Bayesian method to estimate the demand for music and iPods, and find three things. First, music piracy decreases music sales by 24% to 42%. Second, music piracy contributes 12% to iPod sales. Finally, counterfactual experiments show that Apple's revenue could increase by $36 per student if music were free.
    Keywords: demand estimation, iPod, music piracy
    JEL: K42 L14 L82 O34
    Date: 2012
  17. By: Luis Armando Galvis
    Abstract: This study aims to provide a socio-economic outlook of Bogota, focusing on the first decade of the 21st century. Bogota has become the Colombian most successful city. Socioeconomic indicators such as per capita income, low rates of informality, high coverage of public supplied services and high academic performance point towards the city’s success. In other respects, such as income concentration, Bogota appears as one of the most unequal cities in the country. In transportation and urban mobility the city has not done well. For instance, the average vehicle speed has been declining in recent years in such a way that, among major Latin American cities, Bogota holds the record for longest bus ride, with approximately 70 minutes per trip. RESUMEN: El objetivo del presente documento es presentar un diagnóstico de los aspectos socioeconómicos más importantes de la capital, principalmente en la primera década del siglo XXI. Bogotá se ha consolidado como la metrópoli más exitosa del país en varios aspectos. Algunos indicadores económicos y sociales dan cuenta del éxito de la capital, tales como el ingreso per cápita, bajas tasas de informalidad, la alta cobertura de servicios públicos y el rendimiento académico de sus estudiantes, entre otros. En contraste, en aspectos como la concentración del ingreso, Bogotá aparece como una de las ciudades más desiguales del país. En transporte y movilidad los indicadores han venido desmejorando. Por ejemplo, a velocidad vehicular promedio, la cual se ha reducido en los últimos años, a tal punto que, entre las principales ciudades Latinoamericanas, Bogotá exhibe el récord en mayor duración de viaje en autobús, con aproximadamente 70 minutos por viaje de mayor frecuencia.
    Date: 2013–02–19

This nep-iue issue is ©2013 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.