nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒08‒02
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies By Luz Adriana Flórez
  2. The Efficiency of the Informal Sector on the Search and Matching Framework By Luz Adriana Flórez
  3. Optimal Policy with Informal Sector and Endogenous Savings By Luz Adriana Flórez
  4. Catching up and lagging behind in a balance-of-payments-constrained dual economy By Lavopa A.
  5. The determinants of vat revenue efficiency: recent evidence from Greece By Athanasios O. Tagkalakis
  6. Heterogeneous responses to effective tax enforcement: evidence from Spanish firms By Miguel Almunia; David López-Rodríguez

  1. By: Luz Adriana Flórez
    Abstract: This paper contributes to the theoretical analysis of the informal sector in the search and matching framework. Building upon the work of Albrecht et al. (2009), where the informal sector consists of unregulated self-employment, I describe the search and matching equilibrium in an economy with an informal sector where workers are risk neutral and the government can observe when a worker is formal and informal. In this case I solve the matching equilibrium by introducing three policies: unemployment benefits, a formal lump sum tax, and a job creation subsidy. I analyze the effects of these policies on unemployment rates, formal employment and informal employment. I show that these policies affect the incentives of workers to be formal or informal changing the composition of these two types of workers in the labor market. Classification JEL: J46; J65; J68
    Date: 2014–07
  2. By: Luz Adriana Flórez
    Abstract: This paper analyzes efficiency in an economy with an informal sector that consists of unregulated self-employment, and where there are no costs of being informal, (Albrecht et al. (2009)). First, assuming workers in the formal sector are ex-ante heterogeneous, I show that this type of economy is inefficient. Second, I identify the optimal policies the government can implement, where the informal sector is unobserved (or search effort is unobserved). Allowing the government to use different policies such as social security payment, severance payment, formal tax, and job creation subsidy, I show that the government cannot affect worker’s behavior by using severance and social security payments because of the risk neutrality assumption (Lazear (1990)). However, it can achieve an efficient allocation through a tax-credit policy. This result is interesting since it can guide the way in which social security programs can be implemented in developing countries, where in general social protection programs are assumed to subsidize informal activities. Classification JEL: H21; J64; J65
    Date: 2014–07
  3. By: Luz Adriana Flórez
    Abstract: This paper analyzes the effect of social security and lump sum layoff payment in an economy with an informal sector and savings, where the search effort is unobserved. I characterize the optimal consumption/search/non-participant strategy assuming that workers are risk averse and that formal jobs last forever. After including job destruction shocks I solve the model numerically, and focus on the effects of lump sum layoff and social security payments on workers’ decision to be formal, informal or non-participant. I find that severance payments protect formal workers against the unemployment risk. With severance payments workers do not over-accumulate to protect themselves against unemployment, instead they increase the search effort through the re-entitlement effects. In this respect my work resembles that of Coles (2006). I find that in the steady state a high severance payment increases the proportion of formal workers while reduces the proportion of informal workers and those who decide not to participate in the labor market. Even though the optimal policy with severance payment is generous, I find that in the steady state the unemployment rate is low and welfare improves. Classification JEL: D91; J32; J64; J65.
    Date: 2014–07
  4. By: Lavopa A. (UNU-MERIT)
    Abstract: The success of nations in the path towards economic development hinges heavily on the emergence and dynamism of a modern sector capable of simultaneously absorbing an increasing share of the labour force while reducing the technological gap with the worlds frontier. Failure to do so would eventually lead the economy to low- or middle- income traps, in which only a small fraction of the population would benefit from the gains of economic growth and technological progress. Building on previous contributions from Post-Keynesian, Neo-Schumpeterian and Latin-American Structuralism literature, this paper sets up a theoretical model of catching-up among nations aimed at formalizing this idea by exploring the dynamic interactions between structural change and technological upgrading in the process of economic development. The focus of the model is on a representative nation of the South that is characterized by having i a dual structure i.e., a large share of labour force working on low-productive-traditional activities that coexists with a small fraction of workers employed in modern activities; ii a high degree of technological backwardness in the modern activities; and iii a binding restriction on the external accounts. Under these circumstances, the dynamic behaviour of two key variables will determine the success or failure of this economy over time the share of labour in the modern sector and the relative stock of technological knowledge of the modern sector compared to that of the world technological leader. Depending on initial conditions and underlying parameters, the southern economy would be attracted towards four different equilibrium points, each of them entailing extremely different implications in terms of long-run development. After analysing the dynamic properties of the model, simple simulations are implemented in order to illustrate a number of structural trajectories that might shed new light on the complex forces acting behind the success or failure of economic development.
    Keywords: Economic Growth of Open Economies; Macroeconomic Analyses of Economic Development; Technological Change: Choices and Consequences; Diffusion Processes; One, Two, and Multisector Growth Models;
    JEL: O11 O33 O41 F43
    Date: 2014
  5. By: Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper examines the relationship between VAT revenue and economic activity in Greece by estimating the relationship between tax revenue efficiency and real GDP growth rate. We find a positive and significant relationship between these variables, and show that the responsiveness of tax revenue efficiency to economic activity fluctuations has increased in the recent years. Tax efficiency is affected by changes in the ability to curb tax evasion.
    Keywords: VAT; GDP; tax evasion; Greece.
    JEL: C32 E32 H20 O52
    Date: 2014–05
  6. By: Miguel Almunia (University of Warwick); David López-Rodríguez (Banco de España)
    Abstract: This paper investigates the effects of monitoring the information trails generated by firms’ activities in order to improve tax compliance. We use quasi-experimental variation provided by a Large Taxpayers Unit (LTU) in Spain to empirically test the theoretical predictions on firms’ responses to an increase in monitoring effort. Firms with more than €6 million in reported revenue are monitored by the LTU, which devotes more resources to verifying the transactions reported by those firms. Using financial statements from practically the entire universe of Spanish firms for the period 1999-2007, we find substantial bunching of firms just below the LTU threshold. On average, we estimate that bunchers reduce their reported revenue by €101,000 (1.7% of total revenue) to avoid falling in the high enforcement regime. Adjusting for resource costs of evasion faced by firms, we estimate that the marginal bunching firm reduces its reported revenue by up to €593,000 (9.9%). The response is weak in sectors where most sales are made to final consumers (retail, restaurants) and strong in sectors where firms sell intermediate goods to other businesses (wholesale, manufacturing). This result suggests that the monitoring effort by the tax authorities and the traceability of the information reported by firms are complements, and both are necessary for effective tax enforcement. Finally, we provide suggestive evidence that firms under low monitoring effort also misreport their material and labour expenditures to evade taxes, even in the presence of third-party reporting.
    Keywords: tax enforcement, firms, bunching, Spain, Large Taxpayers Unit (LTU).
    JEL: H26 H32
    Date: 2014–07

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