nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒02‒04
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Compliance, Informality and contributive pensions By Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
  2. Colonial legacy, state-building and the salience of ethnicity in Sub-Saharan Africa By Merima Ali; Odd-Helge Fjeldstad; Boqian Jiang; Abdulaziz B. Shifaz
  3. Building fiscal capacity in developing countries: Evidence on the role of information technology By Merima Ali; Abdulaziz B. Shifa; Abebe Shimeles; Firew Woldeyes
  4. Changing patterns in informal work participation in the United States 2013–2015 By Bracha, Anat; Burke, Mary A.; Khachiyan, Arman
  5. Poverty and informality in Ecuador By Carla Canelas

  1. By: Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
    Abstract: We consider a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation. Taxation is exclusively used to finance a pension system. If the pension system is implemented, agents in their old age receive a benefit which includes both a Bismarkian and a Beveridgian component. We show that in the absence of compliance costs, agents are indifferent to the tax rate level as in response, they can perfectly adapt their level of compliance. The public pension system is found to be at least partially contributory in order to increase compliance and thus to increase the tax base. When compliance costs are introduced, perfect substitutability between compliance and taxation breaks down. Depending on the relative returns from public pensions and private savings as well as on the elasticity of compliance to income, we obtain that the preferred tax rate should be increasing or decreasing in income. The majority voting tax rate is more likely to be positive when the median income is low and when the return from public pensions dominates that of private savings. The level of the Bismarkian pillar will now be chosen so as to account for increased political support, for increased direct redistribution toward the worst-off agent, and increased tax base.
    Keywords: Compliance costs, Majority Voting, Public Pensions, Tax Evasion
    JEL: H55 I13 D91
    Date: 2015
  2. By: Merima Ali; Odd-Helge Fjeldstad; Boqian Jiang; Abdulaziz B. Shifaz
    Abstract: Ethnicity has received increased attention in studies of Africa's economic and institutional development. We present evidence on the long-term effects of Britain's "divide-and-rule" colonial strategy that deliberately fostered ethnic rivalries to weaken and control locals. Using micro data from Sub-Saharan Africa, we found that citizens of Anglophone (as compared to Francophone) countries are more likely to: (1) attach greater importance to ethnic identity (vis-a-vis national identity); (2) have weaker norms against tax evasion; and  (3) face extortion by non state actors. We address endogeneity concerns using IV regression and regression-discontinuity. These results suggest that Britain's divide-and-rule strategy may have undermined state-building.
    Keywords: Colonial legacy, development, ethnicity, state capacity, Sub-Saharan Africa, tax, tax evasion
    Date: 2015
  3. By: Merima Ali; Abdulaziz B. Shifa; Abebe Shimeles; Firew Woldeyes
    Abstract: Limited fiscal capacity poses a significant challenge in developing countries. To mitigate this challenge, the adoption of electronic tax systems has been at the forefront of tax reforms; however, there is little systematic empirical evidence on the impact of such reforms. We attempt to narrow this gap by documenting evidence from Ethiopia where there has been a recent surge in the use of electronic sales registry machines (ESRMs). Using administrative data covering all business taxpayers, we find that ESRM use resulted in a large and significant increase in tax payments. Moreover, this effect is driven by firms that were more likely to evade taxes prior to ESRM use. The results highlight the potential role that information technology may play in strengthening state fiscal capacity in developing countries.  
    Keywords: Developing economy; fiscal capacity; information technology; taxation.
    Date: 2015
  4. By: Bracha, Anat (Federal Reserve Bank of Boston); Burke, Mary A. (Federal Reserve Bank of Boston); Khachiyan, Arman (Federal Reserve Bank of Boston)
    Abstract: In light of the weak labor market conditions in the United States from 2008 until recently, one might have expected that participation in alternative income-generating activities, such as informal side-jobs, would have increased during that period. By the same logic, participation in informal work should have declined more recently, as conditions in the formal labor market improved. However, recent technological innovations have created a number of new opportunities for engaging in informal work. Such innovations may have promoted structural increases in informal work participation; if so we would expect informal work participation to remain elevated or increase further even as the economy improves. To test these predictions the authors designed the Survey of Informal Work Participation, fielded within the Federal Reserve Bank of New York’s Survey of Consumer Expectations. The survey was fielded in December 2013 and again in January 2015, on two separate, nationally representative samples. The first survey was designed mainly to assess the extent and intensity of participation in paid informal work activities and its determinants, the types of activities engaged in, and the extent to which such activities helped individuals to compensate for negative economic shocks during and after the recession. The second survey was designed to follow up on the main outcomes of the first and to determine whether the motivations for engaging in informal work and/or the types of people drawn to such work, had changed as the labor market improved.
    JEL: R11 R23
    Date: 2015–10–01
  5. By: Carla Canelas
    Abstract: This paper uses national representative data from the Ecuadorian Family Expenditure survey to study the determinants of poverty and informality in the country, taking into account the simultaneous two-way relationship between these two phenomena. The results support the view of a heterogeneous informal market, where informal work is both a demand-led phenomenon as well as a voluntary and primarily supply-led form of employment. As such, informal salaried work and self-employment are both a last resort option for low-skilled workers and a voluntary choice for the more educated and entrepreneurial ones.
    Keywords: : informality, poverty, developing economy
    Date: 2015

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