nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒10‒08
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Measuring the size of the shadow economy using a dynamic general equilibrium model with trends By Solis-Garcia, Mario; Xie, Yingtong
  2. Intensive and Extensive Margins of Response to Taxation: Evidence from the 2009 Polish Reform By Zawisza, Tomasz
  3. A Short “Second Best” Narrative of the Ukrainian Economy/ Una Breve “Segunda Mejor Opción” de Narrativa de la Economía Ucraniana By Soldatos, Gerasimos T.
  4. Violent conflicts in ARMM: Probing the factors related to local political, identity, and shadow-economy hostilities By Joseph J. Capuno
  5. Credit Constraints and Economic Growth in a Dual Economy By Peter Skott; Leopoldo Gomez-Ramirez
  6. Can Micro Credit Schemes Be Introduced by Formal Banking Sector? By Mamoon, Dawood

  1. By: Solis-Garcia, Mario; Xie, Yingtong
    Abstract: We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
    Keywords: Shadow economy, business cycles, DSGE models
    JEL: E26 E32 O17
    Date: 2017–01–03
  2. By: Zawisza, Tomasz
    Abstract: In this paper we examine two crucial questions regarding the design of the optimal tax system, exploiting the 2009 Polish tax reforms. Firstly, we estimate the degree of substitution between the employment and self-employment tax bases on the extensive margin. In particular, we quantify the impact of changes in the differential in rates of taxation between the two tax bases on the propensity of taxpayers to declare any positive level of employment or self-employment income. Secondly, we contribute to the literature on elasticities of taxable income by providing estimates which are robust to changes in year-to-year income dynamics. We do this by exploiting variation in marginal tax rates around the 2009 reforms which occurs independently of an individual’s position in the income distribution as a result of joint reporting with a spouse. The baseline estimates of the intensive-margin elasticities are 0.23 for the employed and 0.66 for the self-employed. The estimates jointly make possible a decomposition of responses to the tax reform of declared income into the intensive and extensive-margins, with the contribution of the extensive margin found to be around 7 percent of the total.
    Date: 2017–09–26
  3. By: Soldatos, Gerasimos T.
    Abstract: This article maintains that in our second best world, neither corruption nor the informal sector and political instability can be held responsible for the moderate performance of the Ukrainian economy. Corruption in Ukraine appears to act as “grease in the wheels of the economy”, while informal activities add to the welfare of its people. And, no connection of political instability with economic performance may be contemplated conclusively. The cause of the inefficiency of private and public investment is traced to poor public governance. Massive infrastructure investments can become the remedy (i) in the context of public-private partnerships with the collaboration of the subnational governments, and (ii) in financing the projects through domestic monetary expansion, under a macroeconomic policy viewpoint emphasizing the monetary rather than fiscal side of the venture. The proposed monetary expansion can only work only under the proper multiplier, accelerator, and capital accumulation link. Special care should be taken to improve the industrial organization of the inefficient banking sector Este artículo manifiesta que en nuestro mundo de la segunda mejor opción, no se puede atribuir ni a la corrupción ni al sector informal y a la inestabilidad política el rendimiento limitado de la economía ucraniana. En Ucrania, la corrupción parece funcionar como “lubrificante para las ruedas de la economía”, mientras las actividades incrementan el bienestar de su pueblo. Además, no se puede contemplar de manera definitiva ninguna conexión entre la inestabilidad política y el rendimiento económico. La causa de la ineficencia de las inversiones particulares y públicas resalen a la gobernación pública ineficaz. Las inversiones masivas en infraestructuras pueden constituir un remedio (i) en el ámbito de partenariados entre los sectores públicos y privados con la colaboración del gobierno a nivel sub-nacional y (ii) financiando los proyectos mediante una expansión monetaria interior, desde un punto de vista de política macroeconómica que se enfoque en el aspecto monetario de la inversión más que en el fiscal. La expansión monetaria propuesta puede funcionar únicamente con el enlace correcto entre multiplicadores, aceleradores y la acumulación de capital. Se debe cuidar en particular de mejorar la organización del sector bancario actualmente ineficiente.
    Keywords: Ukrainian economy, Second-best theory, Infrastructure investments, Monetary expansion; Economía ucraniana, teoría de la segunda mejor opción, inversiones en infraestructura, expansión monetaria
    JEL: E26 E63 H11 H54 H83 I31 J01 O11 O52 P20
    Date: 2016–08
  4. By: Joseph J. Capuno (School of Economics, University of the Philippines Diliman)
    Abstract: The Philippines has a long history of internecine warfare or conflicts, especially in Mindanao where the secessionist conflicts alone since the 1970s have resulted in enormous human and economic costs. That violent social discords remain varied and widespread in Mindanao underscores the need for a better understanding of their causes to guide policy. Applying regression analysis on a panel dataset for 2011-2014, we examine the factors behind the municipal- and city-level incidence of violent conflicts related to political, identity and shadow-economy issues in the Autonomous Region of Muslim Mindanao. Indicating that geography matters, we find evidence that conflicts spill over between neighboring localities, although the type of conflicts in one locality may not be same as that in its neighbors. Having many neighbors makes a locality more susceptible to political or identity conflicts, while those lying along the coast are more prone to shadow-economy conflicts. Indicating the importance of the quality of local governance, there are fewer cases of identity conflicts in localities where the mayor was re-elected, but more cases of shadow-economy and identity conflicts where the mayor and the vice-mayor or the district representative to Congress are relatives or belong to the same political clan. Also, we find the level of local government fiscal resources to be associated with lower incidence of identity conflicts, but also with higher incidence of disputes related to the underground economy. Moreover, the incidence of identity or shadow economy conflicts is higher in cities and in highly-urbanized provincial capitals than in municipalities. Finally, we find that political conflicts are indeed more frequent in 2013 (election year), and that both identity and shadow economy conflicts have become prevalent in 2014 than in 2011. These results identify some critical areas for interventions to reduce the occurrence or spread of violent discords in ARMM.
    Keywords: Political conflicts; identity conflicts; shadow economy; local governments; negative binomial model; Mindanao
    JEL: O17 O18 R10 H77
    Date: 2017–09
  5. By: Peter Skott (University of Massachusetts - Amherst); Leopoldo Gomez-Ramirez (Universidad del Norte, Colombia)
    Abstract: Pervasive credit constraints have been seen as major sources of slow growth in developing economies. This paper clarifies a mechanism through which an inefficient financial system can reduce productivity growth. Using a two-sector model, second, we examine the implications for employment and the distribution of income. Both classical and Keynesian versions of the model are considered; saving decisions are central in the classical version while firms’ investment and pricing decisions take center stage in the Keynesian version. We find that, although boosting the asymptotic rate of growth, a relaxation of credit constraints may reduce the share of the formal sector, increase inequality and underemployment, and have little or no effect on the medium-run rate of growth.
    Keywords: credit constraints, productivity growth, dual economy, underemployment, income distribution
    JEL: O11 O41 E2
    Date: 2017
  6. By: Mamoon, Dawood
    Abstract: The paper explains the supply side dynamics of micro credit that is about the sustainability of Micro Finance Institutions. The study suggests that formal banking sector framework should be applied to micro credit schemes to analyse their efficiency. This may help us provide a methodology unconventional to micro credit literature that can provide guidelines for successful micro credit endeavors by formal financial institutions.
    Keywords: Financial Institutions, Micro Credit, Poverty
    JEL: G21
    Date: 2017–10–02

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