nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒11‒17
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Cross-subsidies, and the elasticity of informality to social expenditures By Alonso-Ortiz, Jorge; Leal Ordonez, Julio
  2. Firm-Size Wage Gaps along the Formal-Informal Divide: Theory and Evidence By Balkan, Binnur; Tumen, Semih
  3. Corruption, Tax Evasion and Social Values By Litina, Anastasia; Palivos, Theodore
  4. Tax Evasion, Tax Policies and the Role Played by Financial Markets. By Mitra, Shalini
  5. Signaling with Audits: Mimicry, Wasteful Expenditures, and Non-compliance in a Model of Tax Enforcement By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  6. Leaders as Role Models for the Voluntary Provision of Public Goods By Simon Gaechter; Elke Renner
  7. Global trajectories, dynamics, and tendencies of business software piracy: benchmarking IPRs harmonization By Asongu, Simplice A; Andrés, Antonio R.

  1. By: Alonso-Ortiz, Jorge; Leal Ordonez, Julio
    Abstract: In the quest to alleviate the lack of protection of an important group in the population, social programs directed to informal workers are being introduced in developing countries. How is the size of the informal sector affected when the distribution across formal and informal workers and/or the generosity of social transfers change? The nature of many tax and transfer systems imply a cross subsidy from high-income to low-income workers. Thus, depending on the wage of the worker, the transfers tied to formal jobs could be bigger, equal, or smaller than the taxes paid. The effects of changes in taxes and transfers greatly depend on which of the three situations above is the one prevailing for the marginal worker. In this paper, we use a search frictions model with an informal sector, heterogeneous workers, and conditional taxes and transfers to address this question. In the model formal sector jobs are tied to larger benefits, and are less risky, but harder to get. We calibrate the model to the Mexican economy and perform a number of counter-factuals. We find that the size of the informal sector is quite inelastic to marginal changes in the generosity of transfers due to the presence of two opposing forces on the marginal worker: more taxes vs. more transfers. In comparison, the informal sector is more elastic to changes in the distribution of transfers because only one force is present in this case. Our results are consistent with the novel empirical evidence found in Almeida and Carneiro (2012) for Brazil, and with the evidence found in Azuara and Marinescu (2013) on the effects of Seguro Popular in Mexico.
    Keywords: Informal Sector, Taxes and Transfers, Seguro Popular, Search
    JEL: E24 E26
    Date: 2014–04–05
  2. By: Balkan, Binnur; Tumen, Semih
    Abstract: Observationally equivalent workers are paid higher wages in larger firms. This fact is often named as the "firm-size wage gap" and is regarded as a key empirical puzzle. Using micro-level data from Turkey, we document a new stylized fact: the firm-size wage gap is more pronounced for informal (unregistered) jobs than for formal (registered) jobs. To explain this fact, we develop a two-stage wage-posting game with market imperfections and segmented markets, the solution to which produces wages as a function of firm size in a well-defined subgame-perfect equilibrium. The model proposes two explanations. First, taxes on formal employment generate a wedge between formal and informal size wage gaps. Thus, government policy can potentially affect the magnitude of the firm-size wage gaps. The second explanation features a market-based framework with strategic interactions. Relative to small firms, large firms typically post higher wages for both formal and informal jobs they open. A high-wage formal job attracts a larger pool of applicants than a high-wage informal job. The larger pool of applicants for the formal job, in turn, allows the firm to somewhat lower the initial wage offer, while this second-round effect is negligible for informal jobs. As a result, size differentials are lower in formal jobs than informal jobs. We argue that the observed patterns in the use of social connections in job search and heterogeneity in job preferences can be used to justify the validity of this second mechanism.
    Keywords: Firm size; wage gap; informal job; wage posting; subgame perfection; taxes; social networks.
    JEL: C78 J21 J31 L11
    Date: 2014–09–01
  3. By: Litina, Anastasia; Palivos, Theodore
    Abstract: We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that corruption may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate multiplicity. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.
    Keywords: Corruption, Tax Evasion, Multiple Equilibria, Stigma
    JEL: D73 E62 H26
    Date: 2014–09–09
  4. By: Mitra, Shalini
    Abstract: In a dynamic general equilibrium model with credit constraints and heterogeneous firms I show that both tax policies and domestic financial market development (FD) can lead to lower informality. Tax policies are more effective in reducing informality since they directly increase the cost of informal production but they have limits, trade-offs and costly general equilibrium effects. FD lowers formal borrowing costs which increases the marginal benefit of hiring in the formal sector. Wage rate increases driving down informal production. Formal output, employment, tax revenue and welfare all increase with FD and counter or offset the negative effects of tax policies.
    Keywords: Informal sector, tax policies, heterogenous firms, financial frictions
    JEL: D5 D52 H26 O17
    Date: 2014–09
  5. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: The audit policy of a tax authority can signal its audit effectiveness. We model this process and show that in limited circumstances an ineffective authority can masquerade as being effective. We show that high maximal penalties imply underreporting of income.
    JEL: C71 D82 D86
    Date: 2014–01
  6. By: Simon Gaechter (School of Economics, University of Nottingham); Elke Renner (School of Economics, University of Nottingham)
    Abstract: We investigate the link between leadership, beliefs and pro-social behavior. This link is interesting because field evidence suggests that people’s behavior in domains like charitable giving, tax evasion, corporate culture and corruption is influenced by leaders (CEOs, politicians) and beliefs about others’ behavior. Our framework is an experimental public goods game with a leader. We find that leaders strongly shape their followers’ initial beliefs and contributions. In later rounds, followers put more weight on other followers’ past behavior than on the leader’s current action. This creates a path dependency the leader can hardly correct. We discuss the implications for understanding belief effects in naturally occurring situations.
    Keywords: Leadership, beliefs, experiments, public goods, path dependency, public policy, management.
  7. By: Asongu, Simplice A; Andrés, Antonio R.
    Abstract: In this paper, we examine global trajectories, dynamics, and tendencies of software piracy to ease the benchmarking of current efforts towards harmonizing the standards and enforcements of Intellectual Property Rights (henceforth IPRs) protection worldwide. Our empirical exercise is based on 15 different panel regressions, which together consists of 99 countries. The richness of the dataset allows us to disaggregate countries into fundamental characteristics of business software piracy based on income-levels (high-income, lower-middle-income, upper-middle-income and low-income), legal-origins (English common-law, French civil-law, German civil-law and, Scandinavian civil-law) and, regional proximity (South Asia, Europe & Central Asia, East Asia & the Pacific, Middle East & North Africa, Latin America & the Caribbean and, Sub-Saharan Africa). Our main finding suggest that, a genuine timeframe for standardizing IPRs laws in the fight against software piracy is most feasible within a horizon of 4.3 to 10.4 years. In other words, full (100%) convergence within the specified timeframe will mean the enforcements of IPRs regimes without distinction of nationality or locality within identified fundamental characteristics of software piracy. The absence of convergence (in absolute and conditional terms) for the World panel indicates that, blanket policies may not be effective unless they are contingent on the prevailing trajectories, dynamics and tendencies of software piracy. Policy implications and caveats are also discussed.
    Keywords: Piracy; Business Software; Software piracy; Intellectual Property Rights; Panel data; Convergence
    JEL: F42 K42 O34 O38 O57
    Date: 2014–06–15

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