nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒09‒28
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms By Degryse, Hans; Lu, Liping; Ongena, Steven
  2. Entrepreneurship in the Informal Economy of Latin America and the Caribbean: A conceptual model of the finance-performance nexus By Morgan, Horatio M.
  3. Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico By Frías, Judith A; Kumler, Todd; Verhoogen, Eric A
  4. Accession to the World Trade Organization and Tariff Evasion By Javorcik, Beata; Narciso, Gaia
  5. The Informal Labour Market in India: Transitory or Permanent Employment for Migrants? By Junankar, Pramod N. (Raja); Shonchoy, Abu

  1. By: Degryse, Hans; Lu, Liping; Ongena, Steven
    Abstract: The recent financial crisis has reopened the debate on the impact of informal and formal finance on firm growth in developing countries. Using unique survey data, we find that informal finance is associated with higher sales growth for small firms and lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Informal finance offers informational and monitoring advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the simultaneous use of formal and informal finance, is the optimal choice for small firms.
    Keywords: Co-Funding; Formal Finance; Growth; Informal Finance
    JEL: G21 G32 P2
    Date: 2013–06
  2. By: Morgan, Horatio M.
    Abstract: Although the size of the informal economy is relatively large across Latin America and the Caribbean, it is not completely understood how deficiencies in the institutional environment may be related either to the propensity for entrepreneurship or the performance of entrepreneurs in the informal economy. Focusing on institutional heterogeneity, this paper characterizes external finance (i.e. local family-based equity, remittances, bank credit, business angel finance and venture capital) in terms of (1) the mix of finance, business consulting and contacts, (2) governance mechanisms (i.e. reputational capital versus formal contracts) and (3) fungibility (i.e. discretion to use funds borrowed or received for alternative purposes); and develop a number of propositions. The outcome is a finance-performance nexus that provides a basis for a theoretically grounded empirical investigation of the relationship between the financial aspects of the institutional environment and both the propensity for entrepreneurship and the performance of entrepreneurs in the informal economy.
    Keywords: Bank Credit; Entrepreneurship; Family-based Equity; Informal Economy; Latin America and the Caribbean; Remittances.
    JEL: G21 L26 M13 O17 O43
    Date: 2013–08–19
  3. By: Frías, Judith A; Kumler, Todd; Verhoogen, Eric A
    Abstract: Non-compliance of firms with tax regulations is a major constraint on state capacity in developing countries. We focus on an arguably under-appreciated dimension of non-compliance: under-reporting of wages by formal firms to evade payroll taxes. We develop a simple partial-equilibrium model of endogenous compliance by heterogeneous firms to guide the empirical investigation. We then compare two independent sources of individual-level wage information from Mexico -- firms' wage reports to the Mexican social security agency and workers' responses to a household labor-force survey -- to investigate the extent of wage under-reporting and how it responded to an important change in the social security system. We document that under-reporting by formal firms is extensive, and that compliance is better in larger firms. Using a difference-in-differences strategy based on the 1997 Mexican pension reform, which effectively tied pension benefits more closely to reported wages for younger workers than for older workers, we show that the reform led to a relative decline in under-reporting for younger workers. Within metro area/sector/firm size cells, the decline in under-reporting was greater in cells initially employing a younger workforce on average. The empirical patterns are consistent with our theoretical model and suggest that giving employees incentives and information to improve the accuracy of employer reports can be an effective way to improve payroll-tax compliance.
    Keywords: heterogeneous firms; Mexico; pension reform; state capacity; tax compliance
    JEL: H26 H55 O17
    Date: 2013–09
  4. By: Javorcik, Beata; Narciso, Gaia
    Abstract: This study documents some unintended consequences of the WTO membership by providing evidence on displacement of tariff evasion driven by the WTO accession process. We argue that implementation of Article VII of the GATT resulted in limiting discretion of customs officials in terms of assessing unit values of goods. While prior to the WTO accession, officials were free to use minimum or reference prices, after their country joined the WTO they were mandated to accept the invoice issued by the exporter. This limited the scope for negotiation between importers and customs officials and their ability to misrepresent import prices. This institutional reform has effectively shut down one channel of import duty evasion. Dishonest importers have responded by relying more heavily on alternative evasion channels, such as undercounting quantities and product misclassification. We formally test these hypotheses using data on 15 countries which joined the WTO between 1996 and 2008. We calculate the discrepancy in the unit values of imports as reported by the exporter and the importer and find that there is a positive relationship between the tariff rate and misrepresentation of import prices prior to the accession. This relationship disappears after the country joins the WTO. However, at the same time we find that removing the opportunity to underreport unit values has induced importers to underreport quantities. We find that in the post-accession period there is a positive and statistically significant relationship between underreporting of import quantities and the tariff rate. Further, we find that the relationship between the tariff on similar products and underreporting quantities becomes stronger after the accession, which is suggestive of product misclassification becoming more widespread.
    Keywords: import duties; tax evasion; WTO
    JEL: F13 F14
    Date: 2013–08
  5. By: Junankar, Pramod N. (Raja) (University of New South Wales); Shonchoy, Abu (Institute of Developing Economies (IDE-JETRO))
    Abstract: This paper studies the characteristics of the workers in the informal economy and whether migrants treat this sector as a temporary location before moving on to the organised or formal sector to improve their life time income and life style. We limit our study to the Indian urban (non-Agricultural) sector and study the characteristics of the household heads that belong to the Informal Sector (Self Employed and Informal Wage Workers) and the Formal Sector. We find that household heads that are less educated, come from the poorer households, lower social groups (castes and religions) are more likely to be in the informal sector. We distinguish between migrants who come from rural areas and urban areas to their present urban location. We find that the longer duration of a rural migrant in the urban area, the lower the probability that the household head would be in the informal wage labour sector.
    Keywords: informal labour markets, migrant, caste, religion
    JEL: O17 J15 J61 J42
    Date: 2013–08

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