nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒08‒07
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. On the Boundaries of the Shadow Economy: An Empirical Investigation By Manes, Eran; Schneider, Friedrich; Tchetchik, Anat
  2. The Italian Blitz: a natural experiment on audit publicity and tax compliance By Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
  3. Tax Evasion and Institutions. An Experiment on The Role of Principal Witness Regulations By Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
  4. Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 flat tax reform By Vasilev, Aleksandar
  5. Progressive taxation and (in)stability in an exogenous growth model with an informal sector By Vasilev, Aleksandar
  6. Deconstructing Informality: A Response to Vulnerability or an Optimal Choice? By Song, Lina; Appleton, Simon; Liang, Zhe
  7. Informality and Inclusive Growth in Sub-Saharan Africa By Aalia Cassim; Kezia Lilenstein; Morné Oosthuizen; Francois Steenkamp; Tara Caetano
  8. Labor Market Regulations in Sub-Saharan Africa, With a Focus on Senegal By Stephen Golub; Aly Mbaye; Hanyu Chwe
  9. Reverting to Informality: Unregistered Property Transactions and the Erosion of the Titling Reform in Peru By Gutierrez, Italo A.; Molina, Oswaldo

  1. By: Manes, Eran (Jerusalem College of Technology (JTC)); Schneider, Friedrich (University of Linz); Tchetchik, Anat (Ben Gurion University)
    Abstract: A large number of empirical studies pointed to the ongoing expansion of the shadow economy in many countries around the globe. A robust finding in these studies is the positive association between unemployment rates and the size of the unofficial sector. However, with consistent estimates of the size of the unofficial sector only available from the late 1980s, a lack of sufficient time span dictated the use of static models, allowing only a limited understanding of its temporal behavior and interdependence with other covariates. In this paper, we offer a first systematic attempt to estimate the dynamics of the shadow economy, using advanced dynamic panel techniques. Based on insights from a simple job search model of unemployment that features decreasing returns to unofficial activities and congestion effects in job searching, we conjecture a long-run equilibrium relationship between unemployment and the size of the shadow economy. Our empirical model lends strong support to this view. We find that in countries with less stringent job market regulation the long-run impact of Unemployment, the tax burden, and GDP on the shadow economy, while positive and significant, is much smaller than in heavily regulated countries Moreover, the speed of adjustment back to long-run equilibrium following temporary shocks is shown to be three times faster in countries with looser job-market regulation, compared with countries with stricter regulation. These findings have important policy implications.
    Keywords: shadow economy, boundaries to the shadow economy, unemployment, taxation, regulation
    JEL: C32 H11 H26 I2 O17 P16 P48
    Date: 2016–07
  2. By: Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
    Abstract: Tax evasion is a major problem faced by governments across the world, and many strategies have been attempted to minimize its extent. One such strategy is the “fiscal blitz”, consisting in clusters of unexpected tax verification activities targeting businesses. Blitzes have been widely implemented in Italy: the ones taking place in the last years shared many common features, but differed in the level of publicity they received on the media. We use confidential data on Value Added Tax payments at the sector level in two cities to estimate the effect of such publicity on tax compliance of local sellers. By employing a Difference-in-Differences identification strategy, we find that the publicity of the blitz has a positive effect on fiscal declarations made shortly after. The results suggest that increasing awareness on future audits via the media can be an important instrument in the hands of tax authorities.
    Keywords: Tax evasion, Natural experiment, Audit publicity
    JEL: H32 K34 E62
    Date: 2016–07
  3. By: Johannes Buckenmaier; Eugen Dimant (Philosophy, Politics and Economics, University of Pennsylvania); Luigi Mittone
    Abstract: We experimentally study the effectiveness of a principal witness regulation on tax compliance when tax evasion is nested within a corruption framework. Subjects repeatedly declare taxes in institutional environments with and without a principal witness regulation. Our experimental design allows us not only to compare tax compliance under both regimes, but also to investigate whether a transition from one regime to the other can increase compliance or break up established collusive patterns. The results suggest that tax compliance is higher in the presence of a principal witness regulation when the regime is fixed. However, the transition towards a regime with a principal witness regulation has the opposite effect, i.e. introducing it in later rounds causes a drop in compliance. We provide evidence that the effectiveness of new political measures cannot reliably be judged in isolation, but must be considered in view of the actual institutional history, that is the particular institutional framework in place before the measure is introduced.
    Keywords: Corruption, Institutions, Principal Witness Regulation, Tax Compliance, Tax Evasion
    JEL: D03 D73 D81 H26
    Date: 2016–07
  4. By: Vasilev, Aleksandar
    Abstract: This paper provides a quantitative evaluation of the welfare effect of the introduction of proportional taxation in Bulgaria in 2008, an effect that operates through the grey economy channel. Using a general-equilibrium model, augmented with informal sector, a computational experiment is performed to evaluate the welfare gain from the adoption of proportional taxation. The lower effective tax burden in the new tax regime produces a relocation of people into the official sector, stimulates investment, and increases output and consumption. Finally, under the flat tax regime, the size of the informal sector is smaller, and quantitatively consistent with OECD (2009) and European Commission (2012) figures.
    Keywords: taxation,informal sector
    JEL: D91 J46
    Date: 2015
  5. By: Vasilev, Aleksandar
    Abstract: We show that in a exogenous growth model with informal economy calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the the presence of an unofficial production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Under the flat tax regime (2008-14), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the "sink" dynamics.
    Keywords: Progressive taxation,Informal economy,Equilibrium (in)determinacy
    JEL: D91 J46
    Date: 2016
  6. By: Song, Lina (University of Nottingham); Appleton, Simon (University of Nottingham); Liang, Zhe (University of Nottingham)
    Abstract: The rapid growth of informal employment in China in recent decades has attracted attention, but to understand its implications, the concept of informality must be deconstructed. We reclassify employment status into three categories: salaried workers who have long-term contracts; the self-employed; and causal workers without long term contracts (working in either the formal or the informal sector). The monthly earnings of the self-employed are much (47%) higher than those casual employees. Self-employment is not necessarily a misfortune and the flexibility it provides may be optimal for some kinds of workers. For example, the self-employed are more likely to be disabled and to have young families. Institutionally, it is still difficult for casual workers and most rural-urban migrant workers to embark on business ownership. Although a large group of rural-urban migrants are employees with longer term contracts, their rural registration (hukou) means they lack the social protection of urban residents. The labour force with rural hukou is more likely to fall into the informal sector and, within that sector, is most likely to be engaged in casual labouring jobs. Policies to support small businesses may be warranted given the detrimental impacts of informality on casual workers. Experimental interventions could be tried along the lines of those used in Peru to provide funds to support entrepreneurial activities by this group to lift themselves out of a poverty trap into more sustainable employment. Skill training, encouragement for innovation, tax credits and reducing institutional constraints on starting up small business should be all considered.
    Keywords: informality, vulnerability, self-employment, casual labour, China
    JEL: J24 J46 J48
    Date: 2016–07
  7. By: Aalia Cassim; Kezia Lilenstein; Morné Oosthuizen; Francois Steenkamp; Tara Caetano (University of Cape Town; Deputy Director)
    Abstract: This research seeks to explore the relationship between informality and inclusive growth in sub-Saharan Africa, with a particular focus on South Africa. South Africans typically hold one of two opposing views on the informal sector. The first is that informality should be encouraged as an under-utilised source of new employment; the second is that it should be discouraged as an inferior source of employment. The central research question is therefore: “Do informal labour markets promote or constrain inclusive growth?” In order to examine the hypotheses, we use three different methodologies. Firstly, we undertake a regional evidence synthesis examining literature and case studies from the sub-Saharan Africa region. Secondly, we expand on the South African case study and examine the nature of transitions within the labour market. Thirdly, we examine to what extent income shocks may impact the likelihood of engagement within the informal sector.
    Keywords: informality; inclusive growth, employment, labour markets, transitions, South Africa
    JEL: E26 J4 R11
    Date: 2016–02
  8. By: Stephen Golub; Aly Mbaye; Hanyu Chwe (Swarthmore College; Professor of Economics)
    Abstract: Disappointing job creation in Sub-Saharan Africa (SSA), despite improved economic growth, is drawing greater attention to the labor market. Recent research has highlighted the paucity of formal employment and large disparities between formal and informal sector incomes. Formal private sector wage employment has grown too slowly to offset declines in public sector employment and to keep up with labor force growth, so employment remains overwhelmingly informal, with very low wages, no benefits or job security, and hazardous working conditions. The question arises as to whether labor market regulations play a role in limiting formal sector employment creation. We combine quantitative and qualitative assessments of labor-market regulations in SSA, and compare them to countries in other regions, particularly Asia, using indicators of labor market restrictions around the world, and conducting case studies of selected countries. We carried out an in-depth study of Senegal based on interviews and original data collection, and less detailed studies of Ethiopia and Ghana in SSA and Bangladesh and China in Asia. Our main conclusion is that labor market regulations are a less important obstacle than lack of infrastructure and general weaknesses in the business climate, but do contribute to holding back formal employment growth in Senegal and other SSA countries.
    Keywords: Labor market regulations, Sub-Saharan Africa, informal & formal employment, relative unit labor costs, manufacturing
    Date: 2015–12
  9. By: Gutierrez, Italo A.; Molina, Oswaldo
    Abstract: Titling programs have focused only on providing initial tenure security, but have not paid attention to the process of maintaining the formality of future property transactions. Evidence shows that properties become de-regularized due to unregistered transactions in urban slums, reducing the households' ability to reap the potential benefits of tenure security in the future. We exploit a natural experiment provided by the elimination of a registration system targeted to the poor in Peru to identify the effects of increasing the costs and complexity of registering property transactions in urban areas. We found that the elimination of such system led to a significant reduction in the probability of registering a transaction, including those transactions that involved a change in ownership. This presents an important threat to maintaining the benefits of the titling reform in the long run.
    Date: 2016–07

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