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on Informal and Underground Economics |
| By: | Antonio Baez-Morales (Department of Econometrics. University of Barcelona) |
| Abstract: | Informality has been given adverse associations as a result of its economic and social consequences in developed and developing countries. The latter group of countries has been the most affected in terms of low productivity, unprotected workers and the erosion of institutional credibility. Although the determinants of informality have been studied before, the research conducted on micro firms in a developing country has been less notable. In this paper, Mexico is taken as case study due to its high level of micro firm informality and the heterogeneity among Mexican states. The aim of this paper is to analyse the determinants of micro firm informality by state, using different public sources, such as the Encuesta Nacional de Micronegocios (ENAMIN, or the National Micro Firm Survey), the Instituto Nacional de Estadisica (INEGI, or the National Institute for Statistics) and the Secretaría de Economía (SE, or the Secretariat for Economics). Econometric panel data models were estimated for a sample of 32 states over the 2008-2012 period. Furthermore, this paper uses different definitions of informality to check the robustness of the results. The empirical evidence obtained allows us to conclude that, although economic factors are the main causes of informality, variables such as corruption and education have an important role to play. |
| Keywords: | Business surveys; microenterprises, informal economy, entrepreneurship, developing countries, institutions. JEL classification: E26, O17, L26 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:aqr:wpaper:201509&r=iue |
| By: | Antonio Baez-Morales (Faculty of Economics, University of Barcelona) |
| Abstract: | Informality has been given adverse associations as a result of its economic and social consequences in developed and developing countries. The latter group of countries has been the most affected in terms of low productivity, unprotected workers and the erosion of institutional credibility. Although the determinants of informality have been studied before, the research conducted on micro firms in a developing country has been less notable. In this paper, Mexico is taken as case study due to its high level of micro firm informality and the heterogeneity among Mexican states. The aim of this paper is to analyse the determinants of micro firm informality by state, using different public sources, such as the Encuesta Nacional de Micronegocios (ENAMIN, or the National Micro Firm Survey), the Instituto Nacional de Estadisica (INEGI, or the National Institute for Statistics) and the Secretaría de Economía (SE, or the Secretariat for Economics). Econometric panel data models were estimated for a sample of 32 states over the 2008-2012 period. Furthermore, this paper uses different definitions of informality to check the robustness of the results. The empirical evidence obtained allows us to conclude that, although economic factors are the main causes of informality, variables such as corruption and education have an important role to play. |
| Keywords: | microenterprises, informal economy, entrepreneurship, developing countries, institutions. JEL classification: E26, O17, L26 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201514&r=iue |
| By: | De Giorgi, Giacomo (Federal Reserve Bank of New York); Ploenzke, Matthew (Federal Reserve Bank of New York); Rahman, Aminur (World Bank Group) |
| Abstract: | Firm informality is pervasive throughout the developing world, and Bangladesh is no exception. The informal status of many firms substantially reduces the tax basis and therefore affects the provision of public goods. The literature on encouraging formalization has focused predominantly on reducing the direct costs of formalization and has found negligible effects from such policies. In this paper, we focus on a stick intervention, which, to the best of our knowledge, is the first in a developing-country setting to deal with the most direct and dominant form of informality: the lack of registration with the tax authority and direct link to the country’s potential revenue base and thus public goods provision. We implement an experiment in which firms are visited by representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and threatening punishment if it fails to register. We find that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. We also find that only larger-revenue firms at the baseline respond to the threat and register. Our findings have at least two important policy implications: 1) the enforcement angle, which could be an important tool to encourage formalization; and 2) targeting of government resources for formalization to the high-end informal firms. The effects are generally small in level, leaving open the question of why many firms still do not register. |
| Keywords: | firms; informality; development |
| JEL: | O10 |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:728&r=iue |
| By: | Marinescu, Ioana E. (Harris School, University of Chicago); Triyana, Margaret (Nanyang Technological University, Singapore) |
| Abstract: | What are the sources of wage growth in developing countries? In the US, general labor market experience is the key source of wage growth, with job seniority playing a smaller role. By contrast, in Indonesia, the 10-year return to seniority is 24 to 29%, which is higher than the return to experience. Furthermore, we estimate a 35% return to ten years of tenure in the formal sector, with no significant return to tenure in the informal sector. The difference in the sources of wage growth in Indonesia versus the US may be a reflection of Indonesia's lower level of development. |
| Keywords: | experience, formality, informality, wages, tenure |
| JEL: | J31 O1 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9066&r=iue |
| By: | Sven Neelsen (Erasmus University Rotterdam, the Netherlands); Supon Limwattananon (Ministry of Public Health, Thailand; Khon Kaen University, Thailand); Owen O'Donnell (Erasmus University Rotterdam, the Netherlands); Eddy van Doorslaer (Erasmus University Rotterdam, the Netherlands) |
| Abstract: | We examine economic vulnerability to illness when, as for informal sector workers in Thailand, there is universal coverage for health care but earnings losses are uninsured. Even with comprehensive health care entitlement, severe illness that strikes an initially healthy worker is found to raise out-of-pocket medical expenses by around two thirds and increase the probability that medical spending absorbs more than a tenth of the household budget by nine percentage points. Moreover, severe illness reduces the probability of remaining in employment by 18 points and precipitates a reduction in household labor income of almost one third. Despite the rise in medical expenses and fall in earnings, households are able to maintain expenditure on goods and services other than medical care by drawing on remittances and informal transfers, cutting back on saving, and by borrowing. In the short term, informal insurance fills gaps left uncovered by formal insurance but there is likely to be subst antial exposure to economic risks associated with long-term illness. |
| Keywords: | Health; medical expenditure; social insurance; universal coverage; Thailand |
| JEL: | I13 O12 |
| Date: | 2015–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150060&r=iue |
| By: | Dimitrios Varvarigos |
| Abstract: | I study the effects of tax evasion on economic growth by focusing on the cultural aspects of tax compliance and their effect on the extensive margin of tax evasion. A cultural norm that determines the contemptibility of tax dodging practices links the past incidence of tax evasion with the tax payers’ current incentives to conceal sources of income. This dynamic complementarity may lead to multiple equilibria in the evolution of tax evasion. Due to the latter’s effect on capital accumulation, this multiplicity may lead economies in divergent development paths, as long as they differ in the initial magnitude of tax evasion. This happens even though economies may be, on the outset, identical in terms of capital stock and structural characteristics, including those that govern tax enforcement. |
| Keywords: | Tax evasion; Economic Growth; Cultural Norms |
| JEL: | H26 O41 Z1 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:15/10&r=iue |
| By: | Lorenzo Casaburi; Ugo Troiano |
| Abstract: | The incentives of political agents to enforce tax collection are key determinants of the levels of compliance. We study the electoral response to the Ghost Buildings program, a nationwide anti-tax evasion policy in Italy that used innovative monitoring technologies to target buildings hidden from tax authorities. The program induced monetary and non-monetary benefits for non-evaders. A one standard deviation increase in town-level program intensity leads to a 4.8 percent increase in local incumbent reelection rates. In addition, these political returns are higher in areas with lower tax evasion tolerance and with higher efficiency of public good provision, implying complementarity among enforcement policies, the underlying tax culture, and the quality of the government. |
| JEL: | D72 H26 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21185&r=iue |
| By: | Soldatos, Gerasimos |
| Abstract: | This paper demonstrates theoretically that a profit tax does not affect the distribution of the firm’s operations between the official and the underground economy. Or, if the firm was initially operating only officially, direct taxation of its business would not be a reason to go underground. Indirect taxation in the form of a sales tax does influence an already existing mix of official and underground activities, favoring the latter. And, it does constitute a reason to “go underground” for an otherwise fully official business. This is a thesis robust to market structure changes and to introducing tax evasion in the usual sense, provided the underground demand is inelastic. The tax authority can still collect the planned tax revenue through a combination of a cash-flow tax with indirect taxation, under only consumer-surplus loss by the underground customer. |
| Keywords: | Inelastic underground demand, Business-tax shift, Tax policy |
| JEL: | D21 E26 H26 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64598&r=iue |
| By: | Gillanders, Robert; Parviainen, Sinikka |
| Abstract: | The links between corruption and the shadow economy have mostly been studied empirically at the country level. This paper contributes to this literature by examining the relationship at the sub-national level. Using World Bank Enterprise Survey data, we find that sub-national units in which more firms report that corruption is an obstacle to their operations also tend to have more firms that report informal competitors as an obstacle and vice versa. We also ask whether within country variation matters and find that regions with a bigger problem in one of these dimensions than their national average also tend to have a relatively bigger problem in the other dimension. Sub-Saharan Africa is different in that neither of these findings are evident in that sub-sample. |
| Keywords: | corruption; shadow economy; regional variation; within-country variation |
| JEL: | D73 K49 O17 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64510&r=iue |
| By: | Anett John (née Hofmann) |
| Abstract: | Empirical evidence suggests that there is a high demand for informal savings mechanisms even though these often feature negative returns - such as deposit collectors, ROSCAs, microloans, and informal borrowing. This paper argues that individuals may face even higher negative returns to saving at home due to hyperbolic discounting and claims on savings by relatives. I outline a model that shows why hyperbolic discounters cannot reach their welfare-maximising level of savings, and why a commitment savings product with fixed period contributions can increase their achievable savings level. Using a novel dataset obtained from a small microfinance institution in Bangladesh, the paper then presents some first empirical evidence on the effects of a commitment savings product with fixed regular instalments. I find that the introduction of the regular saver product was associated with an increase in individuals' savings contributions of 180 percent after a periods of five months. The paper concludes that the provision of commitment savings products with fixed contributions may reduce savings constraints and increase individuals' welfare, providing a substitute for costly informal mechanisms. However, since the data originates from a field study with self-selection problems rather than a randomized controlled experiment, further studies are needed to confirm this effect. |
| Keywords: | commitment savings, hyperbolic discounting, Bangladesh |
| JEL: | D14 O11 O16 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stieop:051&r=iue |