nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒09‒24
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Currency demandand MIMIC models: towards a structured hybrid model-based estimation of the shadow economy size By Piotr Dybka; Michal Kowalczuk; Bartosz Olesinski; Marek Rozkrut; Andrzej Toroj
  2. Comparing estimated and self-reported markups for formal and informal firms in an emerging market context By John Rand
  3. Political participation and party capture in a dualized economy: A game theory approach By Kellermann, Kim Leonie
  4. How the European Commission and European countries fight VAT fraud By Tomasz Michalik
  5. Policy diffusion within international organizations: A bottom-up analysis of International Monetary Fund tax work in Panama, Seychelles, and the Netherlands By Matti Ylönen

  1. By: Piotr Dybka; Michal Kowalczuk; Bartosz Olesinski; Marek Rozkrut; Andrzej Toroj
    Abstract: Model-based econometric techniques of the shadow economy estimation have been increasingly popular, but a systematic approach to getting the best of their complementarities has so far been missing. We review the dominant approaches in the literature –currency demand analysis (CDA) and MIMIC model – and propose a novel hybrid procedure that addresses their previous critique, in particular the misspecification issues in CDA equations and the vague transformation of the latent variable obtained via MIMIC model into interpretable levels and paths of the shadow economy. Our proposal is based on a new identification scheme for the MIMIC model, referred to as 'reverse standarizaton'. It supplies the MIMIC model with the panel-structured information on the latent variable's mean and variance obtained from the CDA estimates, treating this information as given in the restricted full information maximum likelihood function. This approach allows us to avoid some controversial steps, such as choosing an externally estimated reference point for benchmarking or adopting other ad hoc identifying assumptions. We estimate the shadow economy for up to 43countries, with the results obtained in the range of 2.8% to 29.9% of GDP. Various versions of our models remain robust as regards changes in the level of the shadow economy over time and the relative position of the analysed countries. We also find that the contribution of (a correctly specified) MIMIC model to the measurement of trends in the shadow economy is marginal as compared to the contribution of the CDA model.
    Keywords: Shadow economy, MIMIC,Currency Demand Approach, Restricted Full Information Maximum Likelihood
    JEL: C10 C51 C59 E26 H26 O17
    Date: 2017–09
  2. By: John Rand
    Abstract: Using a 10-year panel survey covering Vietnamese manufacturing firms, we consistently obtain firm-specific mark-up estimates and relate these to firm-level formality. The average firmspecific mark-up using a trans-log revenue production function specification is estimated to be 1,445, with substantial underlying variation across firm size, location, sector, and ownership form. Zooming in on firm-level registration, we find a formality premium of 16 per cent, even when controlling for selection into formality. Moreover, a firm size threshold exists, confirming that smaller informal firms are less likely to reap eventual benefits of formalization. Finally, we find remarkable similarity between average self-reported and estimated mark-ups, but dynamic aspects of the two estimates along key firm dimensions differ substantially.
    Date: 2017
  3. By: Kellermann, Kim Leonie
    Abstract: This paper examines the link of political participation and employment status in a dualized labor market. Both insiders and outsiders can actively take part in political decision-making, e.g. by voting for a certain party. Insiders only have the resources to also provide financial donations to policy-makers. Future policy outcomes are determined in a dynamic two-stage game. First, individuals choose their optimal quantity of support depending on policy strategies. Second, parties determine their optimal policy platform anticipating the individual behavior. In order to collect donations, parties are incentivized to occupy an insider-friendly position. Thereby, insiders are encouraged to participate in politics while outsiders are discouraged. Labor market dualization opens up a gap in political involvement which induces a reinforcement of economic segmentation. However, party capture by insiders is weaker, the more strongly a party is originally tied to outsiders. With two parties competing for support and donations, political inequality becomes firmly established since both parties fully adopt the insiders' preferences.
    JEL: D71 D72 J42 P16
    Date: 2017
  4. By: Tomasz Michalik
    Abstract: The VAT gap, both on the European Union scale and that of particular member states (though not all of them) appeals to the imagination and awakens many extreme emotions. For it is difficult to accept that the level is so significant, and – what is more – in recent years it has narrowed quite insignificantly despite attempts to limit it. In the popular understanding, this gap is quite often identified exclusively with the consequences of fraud, but it has many more component elements, many of which have nothing to do with abuse. Still, this doesn’t change the face that it is precisely fraud and abuse that constitute a particularly significant element of the VAT gap.
    Keywords: Value Added Tax, tax fraud, tax evasion, tax non-compliance, tax avoidance, EU, Poland
    JEL: H26 H25
    Date: 2017–06
  5. By: Matti Ylönen
    Abstract: I analyse the evolution of the International Monetary Fund tax policy advice in three countries commonly used for tax evasion or avoidance: Panama, Seychelles, and the Netherlands. A review of loan agreements and Country Reports covering 1999 to 2017 highlights the dependence of the Fund’s country teams on external assessments produced by the Fund’s other departments and smaller international organizations. Insofar as the Fund has paid attention to international tax flight, its focus has largely been on individual-level tax evasion instead of corporate tax avoidance. The responses have been inconsistent, with the tax haven regime of Seychelles getting much more attention than Panama and the Netherlands.
    Date: 2017

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