nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒11‒29
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Formal and Informal Markets: A Strategic and Dynamic Perspective By Nejat Anbarci; Pedro Gomis-Porqueras; Marcus Pivato
  2. Women entrepreneurs in the informal economy: Is formalization the only solution for business sustainability? By Ramani, Shyama V.; Thutupalli, Ajay; Medovarski, Tamas; Chattopadhyay, Sutapa; Ravichandran, Veena
  3. Informal-formal wage gaps in Colombia By Nancy Daza; Luis Fernando Gamboa
  4. Do informal workers make an underclass? An analysis of subjective social status By Anna Zudina
  5. Role of regulation in micro finance: application of the Micro Savings Requirement Scheme in informal sectors By Marianne, Roedl
  6. The effect of tax enforcement on tax morale By Antonio Filippin; Carlo V. Fiorio; Eliana Viviano
  7. United Kingdom: Technical Assistance Report—Assessment of HMRC’s Tax Gap Analysis By International Monetary Fund. Fiscal Affairs Dept.
  8. Evidence on Unclaimed Charitable Contributions from the Introduction of Third-Party Information Reporting in Denmark By Christian Gillitzer; Peer Ebbesen Skov
  9. Post-socialist anomie through the lens of economic modernization and the formalization of social control By Christopher Swader; Leon Kosals
  10. Guest Workers in the Underground Economy By Slobodan Djajic; Alice Mesnard

  1. By: Nejat Anbarci; Pedro Gomis-Porqueras; Marcus Pivato
    Abstract: In formal markets, to attract buyers, sellers must publicly advertise their prices and locations. But in informal markets, sellers must remain anonymous from government authorities. Since agents' payoffs depend on the ratio of buyers and sellers in each of these markets, all agents try to position themselves in the market which can yield them the highest possible payoff. This strategic interaction in turn critically affects the time evolution of these two markets. In our benchmark model, in which only sellers can switch between these markets, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist. Sellers switch from the formal to the informal market whenever costs of trading in the informal market decrease, and vice versa. In a richer environment, where both sellers and buyers can switch between markets, and the sellers' and buyers' costs of trading in the formal market net of those in the informal market have opposite signs, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist.
    Keywords: Price posting, bargaining, matching, formal sector, informal sector
    JEL: C7 D49
    Date: 2013–11–20
  2. By: Ramani, Shyama V. (Brunel University, UNU-MERIT, and STI4Change); Thutupalli, Ajay (UNU-MERIT); Medovarski, Tamas (STI4Change); Chattopadhyay, Sutapa (UNU-MERIT); Ravichandran, Veena (IDRC)
    Abstract: The existing marketing, strategy and economics literature have little to offer by way of recommendations to promote entrepreneurship in the informal economy, except to advocate that multinationals, local firms, state and public agencies should work together to bring the informal economy into the fold of the formal economy. In contrast, this paper argues that the business sustainability of women entrepreneurs in the informal economy depends upon their engagements or business partnerships with other women (and men) and women-focussed intermediaries. More than formalization, women entrepreneurs need 'spaces' for dialogue with other women (and men) to learn and build business capabilities. Both the State and firms wanting to penetrate the informal economy can create such spaces through partnerships with NGOs and women-focussed organizations. While formalization of entrepreneurial activity is favourable under some circumstances, it can be detrimental under others - necessitating a case by case evaluation rather than a general rule. In order to ensure the business sustainability of women's ventures in the informal economy, any sort of formalization must occur through a gradual process accompanied by intermediaries. These results are formulated through the compilation and analysis of the existing literature and the study of six detailed case studies of women entrepreneurs from developing countries validated by extensive interviews. The results are then used to propose a closed model of linkages between formal and informal economies which has novel organizational implications for firms competing to establish consumer bases and business partnerships in the Base of Pyramid (BoP) markets of developing countries.
    Keywords: Informal economy, entrepreneurship, gender, business sustainability
    JEL: L26 B54 E26
    Date: 2013
  3. By: Nancy Daza (National Planning Department (DNP), Colombia); Luis Fernando Gamboa (Department of Economics, Universidad del Rosario, Colombia)
    Abstract: This document provides recent evidence about the persistency of wage gaps between formal and informal workers in Colombia. The methodology is based on a non-parametric procedure proposed by Nopo (2008a) that allows us to compare labor incomes using matching on variables over a Nationwide Household Survey during 2008-2012. It is found that formal workers earn between 30 to 60 percent more, on average, than informal workers according to the definition of formality adopted and small variations occurs along this period. This is new evidence about the true differences in labor compensation from workers with distinct formality levels in Colombia. These results are important inputs for labor policy in a country with high income inequality levels.
    Keywords: Wage gaps, non-parametric, Colombia, informality.
    JEL: J31 C14 O17
    Date: 2013–08
  4. By: Anna Zudina (Higher School of Economics (Moscow, Russia). Centre for Labour Market Studies. Junior Research Fellow)
    Abstract: This article addresses the elaboration of a new approach to informal employment research based on analyzing subjective social status. In spite of numerous studies conducted over the past 40 years many questions still exist in the field of informal employment research. The heterogeneous nature of activities incorporated into the concept of “informality” defines the ambiguity of its impact on the economy and society. Thus, little is actually known about the socioeconomic position of informal workers and the nature of informal employment. Is informality a kind of stratifying mechanism embedded in the social structure that changes the position of the informally employed, or not? The so-called “direct” approach based on analyzing levels of income was considered to be an inappropriate framework and thus indicated that the consequences of informal employment need to be further analyzed together with indirect – subjective – measures. The present paper discusses methodological issues and presents results concerning the subjective social position of informally employed workers in contrast to formal workers, the unemployed, and the economically inactive population. The study was carried out on the basis of a large nationally representative panel: the Russia Longitudinal Monitoring Survey of the Higher School of Economics (RLMS-HSE) for 2000-2010. The existence of three-tier informal employment in Russia is revealed with self-employment being better off than formal employment and informal wage and salary work. No significant difference between informal wage and salary work and formal employment in terms of subjective social status is found. Thereby, one can suppose that the difference between types of employment is not embedded in the social structure at all. Taken as an indirect indicator of the quality formal employment in Russia, this could point to the great weakness of labor market institutions and the idle channels of social mobility of formal employment in Russia.
    Keywords: subjective social status, informal employment, self employment, segmented labor markets, panel data analysis, RLMS-HSE.
    JEL: J23 J32 J42 J62
    Date: 2013
  5. By: Marianne, Roedl
    Abstract: An innovative aspect of this paper is evidenced through its recommendation of the Micro-Savings Requirement Scheme - which offers numerous benefits – as will be highlighted in this paper. Furthermore, the paper not only addresses how linkages, direct and facilitating linkages, can benefit microfinance institutions – and particularly in jurisdictions where the Savings Group Outreach involvement is particularly low, but also illustrates ways and means whereby group lending and other more recent innovative methods used by micro lenders to secure repayments, could increase the desired effects, efficiency and impact of microfinance in selected jurisdictions. In so doing, it addresses some of the existing and persisting problems of micro finance in rural areas.
    Keywords: microfinance; regulation; agency theory; Micro-Savings Requirement Scheme; Africa; Asia; Latin America
    JEL: D82 G2 G21 K2
    Date: 2013–11–03
  6. By: Antonio Filippin (University of Milan); Carlo V. Fiorio (University of Milan); Eliana Viviano (Bank of Italy)
    Abstract: In this paper we argue that tax enforcement is an additional contextual factor affecting tax morale, one of the most important determinants of tax compliance. By using a unique dataset that merges a representative sample of Italian households with administrative data on tax enforcement, we find first that tax morale is positively correlated with tax enforcement. Second, to deal with possible endogeneity of tax enforcement, we show that results are confirmed in an IV specification using the change in the tax gap at the provincial level as an instrument for tax enforcement. Finally, we provide evidence that the impact of tax enforcement and social environment is stronger at low quantiles of tax morale. Our results show that apart from lowering the expected value of tax evasion, tax enforcement has an additional and indirect effect on tax compliance through its effect on tax morale.
    Keywords: tax morale, tax enforcement, tax gap.
    JEL: H26 H29 D70
    Date: 2013–10
  7. By: International Monetary Fund. Fiscal Affairs Dept.
    Abstract: This report assesses HMRC’s tax gap analysis program and provides advice and guidance on further improving it. The report addresses three aspects of the program: (1) the models and methodologies employed; (2) the approach to disseminating the results; and (3) the use of the results in supporting compliance activities, evaluating tax revenue performance across taxes and the effectiveness of HMRC. The report also raises some areas of possible further research.
    Keywords: Taxes;Indirect taxation;Tax administration;Tax collection;Technical Assistance;United Kingdom;
    Date: 2013–10–22
  8. By: Christian Gillitzer (University of Michigan); Peer Ebbesen Skov (University of Copenhagen)
    Abstract: The introduction of information reporting and pre-population of charitable tax deductions in Denmark in 2008 coincided with a doubling in the number of tax deductions claimed, and a 15 percent rise in the value of claims. We attribute this change to incomplete claiming of eliglbe charitable tax deductions under the prior self-reporting regime: a pre-form randomized audit shows a neglible amount of chaitable overreporting, and we present evidence that there was no change in giving behavior aorund the time of the reform. We estimate that pre-year average amount of forgone tax benefits to be small, but find that many tax-payers repeatedly failed to claim eligble charitable tax deductions under the self-reporting regime. We provide evidence on information frictions from taxpayer behavior due to a notched subsidy scheme.
    Date: 2013–11–13
  9. By: Christopher Swader (Assistant Professor, Department of Sociology, NRU-HSE. Senior Researcher, Laboratory for Comparative Social Reseach, NRU-HSE); Leon Kosals (Professor, Department of Sociology, NRU-HSE. Chief Researcher, Laboratory for Comparative Social Reseach, NRU-HSE)
    Abstract: This paper inquires into how economic modernization impacts normative regulation by spurring, on the one hand (a) formal media of normative regulation (also known as formal social control) in the spheres of politics, economics and interpersonal relations and, on the other hand, (b) informality via the lower density of norms (also known as anomie). This work then asks how these two processes relate to one another. Evidence indicates that modernization is clearly linked to formal media of normative regulation in the spheres of politics (measured as greater government effectiveness), economics (i.e. lower proportion of shadow economy), and interpersonal relations (i.e. less reliance upon family and friendships). Moreso, our multi-level regression models, using World Values Survey data, report that political formality (government effectiveness) at the country level is linked to less anomie at the individual level. Overall, we suggest that economic growth initially brings normlessness through undermining informal social control. However, with greater economic stock, there is a tendency for greater political formalization, formal social control, which brings levels of anomie down. Furthermore, even after all controls, there is a strong anomie syndrome in post-communist societies
    Keywords: economic modernization, formality, informality, social control, anomie, post-socialism
    JEL: O1 Z1
    Date: 2013
  10. By: Slobodan Djajic (The Graduate Institute); Alice Mesnard (City University)
    Abstract: Guest-worker programs have been providing rapidly growing economies with millions of temporary foreign workers over the last couple of decades. With the duration of stay strictly limited by program rules in most of the host countries and wages paid to guest workers often set at sub-market levels, many of the migrants choose to overstay and seek employment in the underground economy. This paper develops a general-equilibrium model that relates the flow of guest workers transiting to the underground economy to the rules of the program, enforcement measures of the host country and market conditions facing migrants at home and abroad.
    Keywords: Temporary migration, undocumented workers, underground economy
    JEL: F22
    Date: 2013–11

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