nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒02‒02
eleven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Optimal Monetary Policy in the Presence of an Informal Sector and Firm-Level Credit Constraints By Ahmed, Waqas; Khan, Sajawal; Rehman, Muhammad
  2. The use of collateral in formal and informal lending By Kislat, Carmen; Menkhoff, Lukas; Neuberger, Doris
  3. Quarterly Bayesian DSGE Model of Pakistan Economy with Informality By Ahmed, Waqas; Rehman, Muhammad; Malik, Jahanzeb
  4. Entrepreneurship versus Joblessness - Explaining the Rise in Self-Employment By Haywood, Luke; Falco, Paolo
  5. Regulation and noncompliance : magnitudes and patterns for India's factories act By Chatterjee, Urmila; Kanbur, Ravi
  6. The Hidden Costs of Tax Evasion - Collaborative Tax Evasion in Markets for Expert Services By Loukas Balafoutas; Adrian Beck; Rudolf Kerschbamer; Matthias Sutter
  7. Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply By Doerrenberg, Philipp; Duncan, Denvil
  8. Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans By Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
  9. Publisher's Announcements and Piracy-Monitoring Devices in Software Adoption By Eric Darmon; Alexandra Rufini; Dominique Torre
  10. Graduated Response Policy and the Behavior of Digital Pirates: Evidence from the French Three-strike (Hadopi) Law By Michael Arnold; Éric Darmon; Sylvain Dejean; Thierry Pénard
  11. Piracy and Movie Revenues: Evidence from Megaupload By Peukert, Christian; Claussen, Jörg; Kretschmer, Tobias

  1. By: Ahmed, Waqas; Khan, Sajawal; Rehman, Muhammad
    Abstract: We analyze, in this paper, the optimality of pro-cyclical monetary policy in the presence of informal sector. Our findings suggest that monetary tightening only in case of severe shock with high leverage ratio and that conventional monetary policy favors both the formal and informal sectors irrespective of the severity of the shocks and hence the whole economy if the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to defend the employment or domestic consumption from falling when negative shock hits the economy. We can not found any disproportionate impact of policies on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly.
    Keywords: Informal Sector, Credit Constraints, Exchange Rate, Monetary Policy
    JEL: E52 F0 F4 O17 O23
    Date: 2013
  2. By: Kislat, Carmen; Menkhoff, Lukas; Neuberger, Doris
    Abstract: The ex ante theory of collateral states that better informed lenders, such as informal lenders, rely less on collateral. We test this by contrasting the use of collateral between formal and informal lenders in the same market. Indeed, formal lenders rely more often on collateral, controlling for conventional determinants of collateral. Moreover, better information about borrowers has implications within lender groups: first, relationship lending reduces asymmetric information, but only for formal lenders who use collateral less with longer relationship; second, short distance between lender and borrower reduces asymmetric information, mainly for informal lenders who use collateral less at shorter distances. --
    JEL: O16 O17 G21
    Date: 2013
  3. By: Ahmed, Waqas; Rehman, Muhammad; Malik, Jahanzeb
    Abstract: In this paper we use the Bayesian methodology to estimate the structural and shocks‟ parameters of the DSGE model in Ahmad et al. (2012). This model includes formal and informal firms both at intermediate and final goods production levels. Households derive utility from leisure, real money balances and consumption. Each household is treated as a unit of labor which is a composite of formal (skilled) and informal (unskilled) labor. The formal (skilled) labor is further divided into types “r” and households have monopoly over each type “r” labor which depends upon degree of education. We go a step further by converting the existing annually calibrated model to quarterly frequency. As a result our impulse response functions have more relevant and realistic policy implications. From the results we do find the shock absorbing role of the informal sector, however, with short term existence. The model estimation diagnostics also confirm robustness and reasonability of the estimation results.
    Keywords: Bayesian Estimation, DSGE Model, Shock Process.
    JEL: E17
    Date: 2013–12
  4. By: Haywood, Luke; Falco, Paolo
    Abstract: The self-employed constitute a large proportion of the workforce in developing countries and the sector has been found to be growing further. Different accounts exist as to the cause of this development, with pull factors such as high returns to capital and increased wealth contrasted with push factors such as barriers to entry into the wage sectors following traditional segmeted labour market models. This article considers changes in the structure of earnings for the self-employed in Ghana and compares them with the wage employed. Models of segmented labour markets typically consider sorting on unobservables to be important, and often posit a sector choice model. If there are barriers to entry into one of the sectors, however, selection on unobservables there may be no clear selection rule. We apply a simple model of a two-sector labour market and estimate earnings using a correlated random coef cients model that allows for multiple patterns of sorting and selection on unobservables using instrumental variables GMM. We nd evidence of increasing return to productive characteristics for the self-employed, but also a large wage premium. --
    JEL: O12 J31 J42
    Date: 2013
  5. By: Chatterjee, Urmila; Kanbur, Ravi
    Abstract: Noncompliance with regulations by enterprises is said to be rife in developing countries. Yet there is limited systematic evidence of the magnitude of noncompliance at the enterprise level. Making innovative use of two complementary data sources, this paper quantifies noncompliance for India's Factories Act without the question of illegality ever being raised directly with enterprises. The paper finds that more than twice as many firms are not complying as are complying. Further, the number of noncompliant firms is much larger than the number of firms adjusting out of the regulation. Thus noncompliance with the Factories Act is a key feature of the"missing middle"in India. The paper explores the main trends and patterns of noncompliance and highlights a number of key issues for further analytical and policy research.
    Keywords: Microfinance,Regulatory Regimes,Labor Markets,Labor Policies,Small Scale Enterprise
    Date: 2014–01–01
  6. By: Loukas Balafoutas; Adrian Beck; Rudolf Kerschbamer; Matthias Sutter
    Abstract: In markets where transactions are governed by contractual incompleteness, revealed intentions to evade taxes may affect market performance. We experimentally examine the impact of tax evasion attempts on the performance of credence goods markets, where contractual incompleteness results from asymmetric information on the welfare maximizing quality of the good. We find that tax evasion attempts – independently of whether they are successful or not – lead to efficiency losses in the form of too low quality and less frequent trade. Thus, shadow economies induce an excess burden not only by hampering the collection of tax revenues, but also by reducing market efficiency.
    Keywords: Credence Goods, Expert Services, Tax Evasion, Fraud, Experiment
    JEL: C72 C91 D82 H26
    Date: 2014–01
  7. By: Doerrenberg, Philipp; Duncan, Denvil
    Abstract: Motivated by the observation that access to evasion opportunities is dis- tributed heterogeneously across the labor market, this paper examines the extent to which labor supply elasticities with respect to tax rates depend on such evasion opportunities. We rst discuss the channels through which ac- cess to evasion a ects labor supply responses and then set up a laboratory experiment in which all participants undertake a real-e ort task over several rounds. Subjects face a tax rate, which varies across rounds and are required to pay taxes on earned income. The treatment group is given the opportunity to underreport income while the control group is not. We nd that partici- pants in the treatment group respond di erently to changes in the net-of-tax rate than participants in the control group. --
    JEL: H21 H24 J22
    Date: 2013
  8. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Hoi, Chun-Keung (Stan) (E. Philip Saunders College of Business, Rochester Institute of Technology); Wu, Qiang (Lally School of Management, Rensselaer Polytechnic Institute); Zhang, Hao (E. Philip Saunders College of Business, Rochester Institute of Technology)
    Abstract: We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent non-price loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks.
    Keywords: tax avoidance; cost of bank loans; information risk; agency risk; audit risk; FIN 48
    JEL: G21 H26
    Date: 2014–01–15
  9. By: Eric Darmon (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Alexandra Rufini (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS]); Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS])
    Abstract: In this paper, we investigate the distribution strategy of a software publisher. The user adoption context is characterized by uncertainty about quality (experience good) and heterogeneous piracy costs. Users can purchase or get unauthorized/illegal copies (digital piracy) of the software during two periods (or not adopt at all). Between these two periods, users can acquire information through word-of-mouth. To maximize profit, the publisher needs to decide about price, quality and level of monitoring of piracy. We show that the software publisher can profit from accommodation a certain level of piracy of the product. We add to the literature by explicitly considering the opportunity for the publisher to cheat about future price and monitoring levels (misleading announcements). This strategy that is falsely permissive towards piracy, can sometimes appear more profitable. However, when the degree of sophistication of user expectations about the publisher's strategy increases, only a strategy that is permissive (with respect to piracy) with non misleading announcements remains robust.
    Keywords: software distribution strategy ; piracy ; experience good ; misleading announcements
    Date: 2014–01–16
  10. By: Michael Arnold (Department of Economics, University of Delaware, US); Éric Darmon (CREM UMR CNRS 6211, University of Rennes 1, France); Sylvain Dejean (LR-MOS, University of La Rochelle, France); Thierry Pénard (CREM UMR CNRS 6211, University of Rennes 1 & University of Delaware)
    Abstract: Most developed countries have tried to restrain digital piracy by strengthening laws against copyright infringement. In 2009, France implemented the Hadopi law. Under this law individuals receive a warning the first two times they are detected illegally sharing content through peer to peer (P2P) networks. Legal action is only taken when a third violation is detected. We analyze the impact of this law on individual behavior. Our theoretical model of illegal behavior under a graduated response law predicts that the perceived probability of detection has no impact on the decision to initially engage in digital piracy, but may reduce the intensity of illegal file sharing by those who do pirate. We test the theory using survey data from French Internet users. Our econometric results indicate that the law has no substantial deterrent eect. In addition, we find evidence that individuals who are better informed about the law and piracy alternatives substitute away from monitored P2P networks and illegally access content through unmonitored channels.
    Date: 2014–01
  11. By: Peukert, Christian; Claussen, Jörg; Kretschmer, Tobias
    Abstract: In this paper we make use of a quasi-experiment in the market for illegal downloading to study movie box office revenues. Exogenous variation comes from the unexpected shutdown of the popular file hosting platform on January 19, 2012. The estimation strategy is based on a quasi difference-in-differences approach. We compare box office revenues before and after the shutdown to a matched control group of movies unaffected by the shutdown. We find that the shutdown had a negative, yet insignificant effect on box office revenues.This counterintuitive result may suggest support for the theoretical perspective of (social) network effects where file-sharing acts as a mechanism to spread information about a good from consumers with zero or low willingness to pay to users with high willingness to pay. --
    JEL: L50 L82 D83
    Date: 2013

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