nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒04‒09
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Money, inflation, and unemployment in the presence of informality By Mohammed Aït Lahcen
  2. The Nexus Between Informal Credit and Informal Labor for Micro and Small Enterprises in Egypt: Sources of Finance and Enterprises Informality: Evidence from MSE Surveys in Two Governorates By Mohamed El Komi; Mona Said
  3. Labour market impact of internal in-migration: A district level analysis of South Africa By Umakrishnan Kollamparambil
  4. The impact of economic globalization on the shadow economy in Egypt By Mohammad Reza Farzanegan; Mai Hassan
  5. Procrastination and Property Tax Compliance: Evidence from a Field Experiment By Michael Chirico; Robert Inman; Charles Loeffler; John MacDonald; Holger Sieg
  6. Endogenous Tax Audits and Taxpayer Assistance Services: Theory and Experiments By Christian A. Vossler; Scott M. Gilpatric
  7. Enforce Tax Compliance, but Cautiously: The Role of Trust in Authorities and Power of Authorities By Tsikas, Stefanos A.

  1. By: Mohammed Aït Lahcen
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the matching channel and the hiring channel. On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, the lower impact of inflation on formal transactions where credit is partially available shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that, in the presence of a sizable informal sector, inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: Informality, Phillips curve, money, labor, search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2017–03
  2. By: Mohamed El Komi (Durham University); Mona Said (American University in Egypt)
    Abstract: As a result of the economic meltdown in 2008, the hardest hit sector of the economy was the micro and small enterprises (MSE’s) sector. MSEs’ access to formal finance has been facing increasing restrictions, due to the adoption of more cautious lending strategies by both public and private banks. Hence, MSEs in Egypt still heavily rely on informal credit to finance their operations. This paper identifies the linkages between different sources of finance and their impact on informality of MSEs based on small scale surveys on credit and labor use in household businesses in villages in two governorates in Egypt. Preliminary analysis of this new data confirms that relying on self-finance is associated with increased informality of the surveyed enterprises in both governorate subsamples, whereas access to formal loans is associated with formalization through enterprise registration in non-agricultural enterprises surveyed in one of the governorates. These results provide preliminary evidence that policies that enhance access to formal credit and attempts to formalize informal sources of credit, such as RoSCAs, are likely to impact MSE’s formalization positively in Egypt.
    Date: 2017–03–30
  3. By: Umakrishnan Kollamparambil
    Abstract: Despite the lack of clarity in literature with regards to the question of whether internal in-migration is a desirable phenomenon for the labor market outcomes, in-migration is often resisted under the premise that it leads to tighter job markets for the locals. This study therefore attempts an empirical verification of the impact of in-migration on labour market outcomes in South Africa. The results of dynamic system GMM regression analysis indicate that in-migration decreases the labour market participation rate of the migrant receiving districts, highlighting migration for non-economic purposes as well as discouraged migrants not seeking work post-migration. While In-migration is not found to alter significantly the employment rate of the receiving areas, indications are that the employment rate is maintained through an expansion of the informal wage employment. There is evidence of non-linear relationship between in-migration and the labour markets of the receiving areas. While initial migration results in the expansion of the formal sector employment, sustained increase in in-migration leads to informalisation of the labour markets. There is hence little evidence of positive self-selection among internal migrants in South Africa. Our results corroborate the Harris-Todaro model’s prediction that in-migration leads to increased informal sector share of the labour markets.
    Keywords: internal migration, labour markets, unemployment, informal sector, Self-employment
    JEL: J61 O17 R23
    Date: 2017–02
  4. By: Mohammad Reza Farzanegan (Philipps-Universität Marburg); Mai Hassan (Philipps-Universität Marburg)
    Abstract: This study examines the economic globalization and the shadow economy nexus in Egypt. Using time series data from 1976 to 2013, the impulse response analysis shows that the response of the shadow economy in Egypt to positive shocks in economic globalization is negative and statistically significant for the first three years following the shock. This finding is obtained by controlling for several intermediary channels in globalization-shadow economy nexus such as education, government spending, industrial production, and labor force participation. Our results show the importance of promoting economic globalization by reducing the costs of doing business and trade in dealing with sizable shadow economy in Egypt.
    Keywords: Shadow economy, Globalization, VAR model, Impulse responses, Egypt
    Date: 2017
  5. By: Michael Chirico; Robert Inman; Charles Loeffler; John MacDonald; Holger Sieg
    Abstract: Municipal governments commonly confront problems with property tax collection. We model tardy taxpayers as procrastinators that have a present bias. Late payments arise due to lack of salience, lack of deterrence or lack of tax morale. To test the importance of the different theoretical explanations, we developed and implemented a randomized controlled experiment conducted with the City of Philadelphia. The structure of the experiment allows us to identify the relative importance of the three key sets of parameters of our model. We find that lack of salience and lack of deterrence are key components of non-compliance behavior.
    JEL: H2 H3 H7
    Date: 2017–03
  6. By: Christian A. Vossler (Department of Economics, University of Tennessee); Scott M. Gilpatric (Department of Economics, University of Tennessee)
    Abstract: In recent years there has been a sharp rise in the information available to individual income taxpayers, such as through tax preparation software provided by third parties and support available by tax agencies, although the effects of this information on tax reporting is not well understood. Within a setting characterized by an endogenous audit process and taxpayer uncertainty, this study uses theory and laboratory experiments to investigate the effects of taxpayer assistance services that better inform taxpayers about their tax liability and the audit process. The endogenous audit rule we study is simple, yet relative to existing work is more likely to characterize the actual incentives facing taxpayers. Among our findings, and in contrast to the case of purely random audits, in theory the effect of information services on tax underreporting is ambiguous, and we find support empirically for increased tax underreporting even in a setting where theory predicts the opposite. When services provide better information on both liability and the audit process, audit information is more salient to participants, negating the strong effects observed when only liability information is provided.
    Keywords: individual income tax; taxpayer assistance services; endogenous audits; tax reporting and enforcement; experimental methods
    JEL: C91 D8 H24 H26 H83
    Date: 2017–03
  7. By: Tsikas, Stefanos A.
    Abstract: The "Slippery Slope Framework" hypothesizes that (an individual's) tax compliance is determined by both the tax authority's powerfulness and its trustworthiness, and that the two dimensions moderate each other. By employing a within-country fixed effects analysis for 25 European countries, this paper tests the conjecture that a slippery slope exists also on the aggregate level. Results show that both trust and power are positively correlated with higher tax compliance. Trust and power also moderate each other: the lower trust, the greater the compliance-increasing impact of power. However, the positive effect decreases with increasing coercion. Strong deterrence policies may eventually damage tax compliance.
    Keywords: Tax compliance; Slippery Slope Framework; trust; power; institutions
    JEL: E62 H26 H30
    Date: 2017–03

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