nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒11‒05
two papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Shadow Economies around the World: New Results for 158 Countries over 1991-2015 By Leandro Medina; Friedrich Schneider
  2. Stock Market Reactions to India's 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial Constraints By Dhammika Dharmapala; Vikramaditya Khanna

  1. By: Leandro Medina; Friedrich Schneider
    Abstract: Using the MIMIC method, this paper is a first attempt to estimate the size of the shadow economy of 158 countries over the period 1991 up to 2015. In addition to performing a variety of robustness tests, this paper explicitly addresses endogeneity concerns to the use of GDP as cause and indicator, by using the light intensity approach as an indicator variable as proxy for the size of the economy. Results suggest that the average size of the shadow economy of these 158 countries over 1991-2015 is 32.5% of official GDP, which was 34.82% in 1991 and decreased to 30.66% in 2015.
    Keywords: shadow economies of 158 countries, MIMIC estimations, the light intensity approach, tax burden, regulation, trade openness, corruption
    JEL: C39 C51 C82 H11 H26
    Date: 2017
  2. By: Dhammika Dharmapala; Vikramaditya Khanna
    Abstract: On November 8, 2016, the Indian government made a surprise announcement that certain currency notes (representing 86% of the currency then in circulation) would no longer be legal tender (although they could be deposited in banks over a limited period). The stated reason for this sudden “demonetization” was to combat tax evasion and corruption associated with “unaccounted-for” cash. We compute abnormal returns for firms on the Indian stock market around this event, and compare patterns of abnormal returns for different subsamples of firms defined by industry, ownership structure, and other characteristics. There is little evidence that sectors thought to be associated with greater tax evasion or corruption experienced significantly different returns. However, we find substantial positive returns for banks and for state owned enterprises (SOEs), implying market expectations that are puzzling in some respects, especially as the initial reactions do not show any evidence of reversal in the five months following the event. The bank results appear to indicate a market expectation of a persistent increase in financial depth. We also find a pattern of higher returns for industries that are characterized by a greater dependence on external finance, possibly suggesting an expectation of an easing of financial constraints. The returns for SOEs may be due to possible indirect effects of the announcement on perceptions of future corruption among these firms.
    Keywords: corruption, tax evasion, demonetization, financial constraints, India
    JEL: E42 H26
    Date: 2017

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