nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒06‒14
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality and Development By Rafael La Porta; Andrei Shleifer
  2. The effect of tax privacy on tax compliance: An experimental investigation By Blaufus, Kay; Bob, Jonathan; Otto, Philipp E.
  3. The effects of rewards on tax compliance decisions By Fochmann, Martin; Kroll, Eike B.
  4. Trade Reform, Environment and Intermediation: Implication for Health Standard By Mandal, Biswajit
  5. Urban Labor Markets in Sub-Saharan Africa By De Vreyer, Philippe; Roubaud, François
  6. Short-term precaution, insurance and saving mechanisms in rural Vietnam By Ha van Dung
  7. The Market for Mules: Risk and Compensation of Cross-Border Drug Couriers By Bjerk, David; Mason, Caleb

  1. By: Rafael La Porta; 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.
    JEL: O17
    Date: 2014–06
  2. By: Blaufus, Kay; Bob, Jonathan; Otto, Philipp E.
    Abstract: In this paper, a tax game with audit costs as a public bad is designed to investigate the impact of public disclosure on tax evasion experimentally. Three different types of tax privacy are tested, ranging from complete privacy to full disclosure. We expect to observe two different effects: first, a contagion effect, arising when an individual observes non-compliance of other individuals and therefore reduces his own tax compliance; second, a shame effect of increased tax compliance due to the anticipated shame of being declared a tax evader. We find evidence of increasing tax evasion with reduced tax privacy if information is disclosed anonymously. Our results also indicate that the shame effect is not strong enough to override the contagion effect when both effects are present. Our results are of particular importance for fiscal policy because public disclosure may lead to more evasion instead of less, due to motivational crowding-out of tax morale. --
    Keywords: Tax privacy,Tax evasion,Public bad,Social norm,Conditional cooperation,Economic experiment
    JEL: H24 H26 H30
    Date: 2014
  3. By: Fochmann, Martin; Kroll, Eike B.
    Abstract: We analyze how the redistribution of tax revenues influences tax compliance behavior by applying different reward mechanisms. In our experiment, subjects have to make two decisions. In the first stage, subjects decide on the contribution to a public good. In the second stage, subjects declare their income from the first stage for taxation. Our main results are threefold: First, from an aggregated perspective, rewards have a negative overall effect on tax compliance. Second, we observe that rewards affect the decision of taxpayers asymmetrically. In particular, rewards have either no effect (for those who are rewarded) or a negative effect (for those who are not rewarded) on tax compliance. Thus, if a high compliance rate of taxpayers is preferred, rewards should not be used by the tax authority. Third, we find an inverse u-shaped relationship between public good contribution and tax compliance. In particular, up to a certain level, tax compliance increases with subjects' own contributions to the public good. Above this level, however, tax compliance decreases with the public good contribution. --
    Keywords: tax evasion,tax compliance,redistribution of taxes,tax affectation,rewarding,public good,behavioral economics,experimental economics
    JEL: C91 D14 H24
    Date: 2014
  4. By: Mandal, Biswajit
    Abstract: Health standard of a region or economy significantly depends on environmental quality. And informal sector has a striking role for overall environmental quality as sometimes producers prefer not to produce in the formal sector as formal production calls for stringent environmental and other governmental regulations. Under such circumstances the informal counterpart of the economy becomes heaven for those producers who do not want to abide by the rules. Extralegality of informal production, by definition, indicates the emergence of intermediation activity. In light of these concerns here I build a standard general equilibrium structure to capture these phenomena and to focus on the effects of trade reform. It has been shown in this paper that tariff reform may lead to greater usage of abatement technology under certain factor intensity assumption. However, interestingly, this can not unambiguously ensure a better environmental quality in broader sense.
    Keywords: Environment, International Trade; Intermediation; General Equilibrium
    JEL: D5 D73 F1 O1 O13
    Date: 2014
  5. By: De Vreyer, Philippe; Roubaud, François
    Abstract: The population of Sub-Saharan Africa stood at 854 million in 2010. Annual population growth averaged 2.5 percent, with a relatively high sustained fertility rate, fostered by the fact that two-thirds of the population is under 25. The region has the highest proportion of poor people in the world, with 47.5 percent of its population living on less than $1.25 a day, as measured in terms of purchasing power parity in 2008. It is also the only region in which the number of poor is still rising. This book contributes to knowledge on the functioning of urban labor markets in Sub-Saharan Africa by investigating following questions: which individuals lack access to employment or are employed beneath their capacities; does education improve working conditions?; what opportunities does the labor market offer to climb the social ladder?; is the lack of good-quality jobs for adults and the poverty it implies one of the reasons for the prevalence of child labor?; do women and ethnic minorities have the same access to the labor market as everyone else?; how does the formal sector live alongside the informal sector?; what role does migration play in the functioning of labor markets?;and are there traits common to all urban labor markets in Africa, or is each country different? This book attempts to answer these questions by studying 11 cities in 10 countries (table O.1). Comparative studies are often based on disparate measurement instruments, which risk marring the validity of the findings. This study is based on a set of perfectly comparable surveys. The study also covers a number of topics (migration, child labor, job satisfaction, discrimination, and work after retirement) in addition to the topics covered by Lachaud (unemployment, access to employment and mobility, segmentation, labor supply, and poverty). This book is divided in five parts. The first is comparative analysis of urban labor markets in Sub-Saharan Africa; second is job quality and labor market conditions in Sub-Saharan Africa; third is dimensions of labor market inequalities; fourth is the key coping mechanisms and private responses; and fifth is moving forward.
    Keywords: Marché du travail; Politique du travail; Afrique noire; Labor & Employment Law; Labor Markets; Labor Policies; Youth and Governance;
    JEL: O55 O17 O15 I32 J21
    Date: 2013
  6. By: Ha van Dung (University of Paderborn)
    Abstract: This study investigates the impacts of short-term precautionary selection and insurance on household decisions regarding the participation in different kinds of saving mechanisms in rural Vietnam. The two-part model is employed for the analysis and unlike other studies I investigate household decisions regarding both, participation and contribution to formal and informal saving intermediaries. Furthermore we control for the endogeneity of the short-term precautionary motive and of insurance in the model of household contribution. The finding suggests that the short-term precautionary motive reduces the household probability to engage into formal and informal saving intermediaries. In addition, insurance is found to be a substitute for short-term precautionary savings. Concerning the contribution aspect, the short-term precautionary motive is found to reduce the participant’s deposits in formal saving intermediaries while there is no evidence for insurance in influencing household contribution to saving intermediaries.
    Keywords: Short-term precautionary motive, insurance, saving intermediaries, cash hoarding, deposits
    JEL: O12 O16 O17
    Date: 2014–06
  7. By: Bjerk, David (Claremont McKenna College); Mason, Caleb (Miller Barondess, LLP)
    Abstract: This paper uses a unique dataset to examine the economics of cross-border drug smuggling. Our results reveal that loads are generally quite large (median 30 kg), but with substantial variance within and across drug types. Males and females, as well as U.S. citizens and non-U.S. citizens are all well represented among mules. We also find that mule compensation is substantial (median $1,313), and varies with load characteristics. Specifically, for mules caught with cocaine and meth, pay appears to be strongly correlated to expected sentence if caught, while pay appears to be primarily correlated with load size for marijuana mules, who generally smuggle much larger loads than those smuggling cocaine and meth. We argue that our results suggest that this underground labor market generally acts like a competitive labor market, where a risk-sensitive, reasonably well-informed, and relatively elastic labor force is compensated for higher risk tasks.
    Keywords: illegal markets, compensating wage differentials, drug smuggling, sentencing
    JEL: K42
    Date: 2014–05

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