nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒04‒25
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income? By Merike Kukk; Karsten Staehr
  2. Trade Reform and Regional Dynamics: Evidence From 25 Years of Brazilian Matched Employer-Employee Data By Rafael Dix-Carneiro; Brian K. Kovak
  3. The Importance of Being in Control of Business: Work Satisfaction of Employers, Own-account Workers and Employees By Jolanda Hessels; José María Millán; Concepción Román
  4. Entrepreneurial Choice of Investment Capital for House-Based Industries: A case study in West Bengal By Shrabani Mukherjee
  5. Mathematical modeling of physical capital using the spatial Solow model By Gilberto Gonz\'alez-Parra; Benito Chen-Charpentier; Abraham J. Arenas; Miguel Diaz-Rodriguez

  1. By: Merike Kukk (Tallinn University of Technology); Karsten Staehr (Tallinn University of Technology Eesti Pank)
    Abstract: Pissarides & Weber (1989) proposed the use of data on income and food consumption for estimating the extent of income underreporting and possibly tax evasion by the self-employed. This paper is the first to investigate the importance of the way in which self-employed households are identified. Using household budget data from Estonia, the underreporting by self-employed households is computed with different identification methods. The share of unreported income is estimated to be at least twice as large when self-employed households are identified using the share of business income than is the case when they are identified using their employment status. Further analysis confirms that the share of reported business income is indeed a better indicator of income underreporting than the reported employment status. The results may facilitate better governance by helping data collectors to identify households prone to income underreporting. Keywords: income underreporting, business income, self-employed, tax auditing, Engel curveJEL codes: H26, E21, E26, H24
    Keywords: income underreporting, business income, self-employed, tax auditing, Engel curve
    JEL: H26 E21 E26 H24
    Date: 2014–01–17
  2. By: Rafael Dix-Carneiro (Duke University); Brian K. Kovak (Carnegie Mellon University)
    Abstract: We empirically study the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. We use variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks, and then examine regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, we do not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, we find steadily growing effects of local shocks on regional formal sector wages and employment for 20 years. This finding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-specific factors such as capital, that adjust slowly and imperfectly to shocks. Next, we document rich margins of adjustment induced by the trade reform at the regional and individual level. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less affected regions, and this gap persists even 20 years after the beginning of trade liberalization. Negative local trade shocks induce workers to shift out of the formal tradable sector and into the formal nontradable sector. Non-employment strongly increases in harder-hit regions in the medium run, but in the longer run, non-employed workers eventually find re-employment in the informal sector. Working age population does not react to these local shocks, but formal sector net migration does, consistent with the relative decline of the formal sector and growth of the informal sector in adversely affected regions.
    Keywords: Local labor markets, Trade liberalization, Transitional dynamics
    JEL: F14 F16 J6
    Date: 2015–01
  3. By: Jolanda Hessels (Erasmus School of Economics, Erasmus Happiness Economics Research Organization (EHERO), Erasmus University Rotterdam, The Netherlands); José María Millán (University of Huelva, Spain); Concepción Román (University of Huelva, Spain)
    Abstract: Self-employed workers can be own-account workers who control their own work or employers who not only are their own boss but also direct others (their employees). We expect both types of self-employed, i.e., own-account workers and employers, to enjoy more independence in determining their work content (type of work) and more flexibility in shaping their work context (e.g., working conditions) compared to paid employees and hence to be more satisfied with their work. Furthermore, we suspect that employers (who can delegate work to their employees and can help them to develop and grow) enjoy even higher levels of work satisfaction compared to both own-account workers (who are their own boss but do not give direction to others) and (non-supervisory) paid employees (who have to obey orders from others within organizational hierarchies). While prior studies typically broadly compare the work satisfaction of self-employed and paid employees, we distinguish employers from own-account workers within the group of self-employed using data from the ECHP for 14 European countries. Our findings indeed show that employers are significantly more satisfied with their work than both own-account workers and paid employees. Additionally, while employers as well as own-account workers enjoy greater procedural utility than (non-supervisory) paid employees stemming from the content and the context of their work, there also seems to be an additional work satisfaction premium for employers.
    Keywords: entrepreneurship; self-employment; employers; own-account workers; work satisfaction
    JEL: J24 J28 L26 O52
    Date: 2015–04–14
  4. By: Shrabani Mukherjee (Madras School of Economics)
    Abstract: The lack of access to formal credit at affordable cost (effective interest) is the most critical constraint faced by the rural entrepreneurs to get involved in productive profitable business activities. This study explores the causes behind the widespread existence of informal credits as investment capital for small house-based business. Based on a primary survey on house based industrial owners in back ward areas of West Bengal it tries to capture the binding constraints in decision process for entrepreneurs to obtain their investment capital from subsidized formal credit market. A binary probit confirms imperfect substitutability between formal and informal credit in investment decision and an ordered probit analysis claims that huge complexity in lending process of formal sector becomes major restraint to access the institutional credit and thus makes the formal credit costlier than alternative sources to use it for industrious purposes.
    Keywords: Formal Credit, Informal Credit, Entrepreneurial Decision, Ordered Probit Analysis
    JEL: C13 D22 D23 R30
    Date: 2015–01
  5. By: Gilberto Gonz\'alez-Parra; Benito Chen-Charpentier; Abraham J. Arenas; Miguel Diaz-Rodriguez
    Abstract: This research deals with the mathematical modeling of the physical capital diffusion through the borders of the countries. The physical capital is considered an important variable for the economic growth of a country. Here we use an extension of the economic Solow model to describe how the smuggling affects the economic growth of the countries. In this study we rely on a production function that is non-concave instead of the classical Cobb-Douglas production function. In order to model the physical capital diffusion through the borders of the country, we developed a model based on a parabolic partial differential equation that describes the dynamics of physical capital and boundary conditions of Neumann type. Smuggling is present in many borders between countries and may include fuel, machinery and food. This smuggling through the borders is a problematic issue for the country's economies. The smuggling problem usually is related mainly to a non-official exchange rate that is different than the official rate or subsides. Numerical simulations are obtained using an explicit finite difference scheme that shows how the physical capital diffusion through the border of the countries. The study of physical capital is a paramount issue for the economic growth of many countries for the next years. The results show that the dynamics of the physical capital when boundary conditions of Neumann type are different than zero differ from the classical economic behavior observed in the classical spatial Solow model without physical capital flux through the borders of countries. Finally, it can be concluded that avoiding the smuggling through the frontiers is an important factor that affects the economic growth of the countries.
    Date: 2015–04

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