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on Informal and Underground Economics |
| By: | Rafael LaPorta; Andrei Shleifer |
| Abstract: | We establish five facts about the informal economy in developing countries.� First, it is huge, reaching about half of the total in the poorest countries.�� Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs.�� Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector.�� Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth.� Fourth, the informal economy is largely disconnected from the formal economy.�� Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement.�� Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life. �These five facts are most consistent with dual models of informality and economic development.� |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:171301&r=iue |
| By: | Joubert, Clement (University of North Carolina, Chapel Hill) |
| Abstract: | This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guaranteeing the same level of income in retirement, by increasing the rate at which the benefits taper off. |
| Keywords: | informality, pensions |
| JEL: | J24 J26 E21 E26 O17 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8211&r=iue |
| By: | Bernal, Noelia (Universidad de Piura); Carpio, Miguel A. (Universidad de Piura); Klein, Tobias J. (Tilburg University) |
| Abstract: | Many developing countries have recently increased health insurance coverage at a large scale. While it is commonly believed that this has positive effects, to date, it is not well understood through which channels health insurance coverage contributes to the well-being of individuals. More generally, the effects are usually not quantified at the individual level. There are two main reasons for this. First, we lack detailed data on health care utilization and health outcomes, and second, it is not easy to control for selection into insurance. The second problem means that a regression of utilization or outcome measures on insurance coverage will yield biased results and will not estimate the causal effects of health insurance. In this paper, we make progress in both directions. We use rich survey data to evaluate the impact of access to the Peruvian Social Health Insurance called "Seguro Integral de Salud" for individuals outside the formal labor market on a variety of measures for health care utilization, preventive care, health expenditures, and health indicators. We address the second concern by exploiting a fuzzy regression discontinuity design. A household is eligible for the program if a welfare index that is calculated from a number of variables is below a specific threshold. We base our analysis on a natural experiment that is generated by variation in the index around the threshold. We interpret our results through the lens of a simple model. As expected, and in contrast to studies for a number of other countries, we find strong effects of insurance coverage on measures of health care utilization, such as visiting a doctor, receiving medication and medical analysis. The program does not strongly incentivice individuals or health care providers to invest into preventive care. In line with this, in general, we find no effects of insurance coverage on preventive care. The only exceptions to this are our findings that, controlling for selection into insurance coverage, women of fertile age with insurance are more likely to receive pregnancy care and that insured individuals are more likely to be vaccinated. This is in line with the stark decrease in maternal and child mortality that was observed after the program was introduced. As for health care expenditures, we generally find positive effects on the mean and the variability. We complement these findings with quantile treatment effect estimates that show increases at the high end of the distribution. Our interpretation is that insured individuals are encouraged by health care professionals to undertake important treatments and pay for this themselves. At the same time, we find no clear effects on health outcomes at the micro level. |
| Keywords: | public health insurance, informal sector, health care utilization, health, regression discontinuity design |
| JEL: | I13 O12 O17 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8213&r=iue |
| By: | Amit Basole |
| Abstract: | There are two divergent perspectives on the impact of subcontracting on firms in the informal sector. According to the benign view, formal sector firms prefer linkages with relatively modern firms in the informal sector, and subcontracting enables capital accumulation and technological improvement in the latter. According to the exploitation view, formal sector firms extract surplus from stagnant, asset-poor informal sector firms that use cheap family labour in home-based production. However, direct, firm-level evidence on the determinants and impact of subcontracting is thus far lacking in the literature. We apply a modified Heckman selection model to Indian National Sample Survey data on informal manufacturing enterprises (2005{06). We find that home-based, relatively asset-poor, and female-owned firms are more likely to be in a subcontracting relationship. Further, we perform selectivity-corrected Oaxaca-Blinder Decomposition and calculate treatment effects to show that subcontracting benefits smaller firms, firms in industrially backward states and rural firms; it is harmful for larger firms, firms in industrially advanced states, and urban firms. Our results suggest that the effects of subcontracting are more complex than those predicted by the divergent perspectives. Policy-makers need to engage with this complexity. |
| Keywords: | sub-contracting, informal sector, Heckman sample selection, Blinder-Oaxaca decomposition |
| JEL: | C31 O17 O53 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:mab:wpaper:2014_08&r=iue |
| By: | Amit Basole |
| Abstract: | Artisanal industrial clusters, geographical agglomerations of small or micro, ‘flexibly-specialized’ enterprises, are an important component of the informal sector from employment generation, poverty alleviation, as well as export promotion perspectives. Two theoretical paradigms have commonly been employed to analyse such clusters: informality and flexible specialization. The first paradigm emphasizes precarious work, surplus labour, and low wages; the second, skilled labour, agglomeration economies, and fashion-sensitive products. This study brings these two perspectives together to address how informal institutions enable clusters to function and how they shape the distribution of risks and gains that accompany flexible specialization. Focusing on the artisanal weaving cluster in the city of Banaras, in North India, I examine the putting-out (subcontracting) system, the system of family-based apprenticeships, and the transfer of fabric designs between firms. In each case, I show how informality and flexible specialization complement and contradict each other. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:mab:wpaper:2014_07&r=iue |