nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒03‒05
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? By Leandro Medina; Friedrich Schneider
  2. Sanctions and the Shadow Economy: Empirical Evidence from Iranian Provinces By Mohammad Reza Farzanegan; Bernd Hayo
  3. Heard it Through the Grapevine: Direct and Network Effects of a Tax Enforcement Field Experiment By William C. Boning; John Guyton; Ronald H. Hodge, II; Joel Slemrod; Ugo Troiano
  4. How Do We Research Tax Morale at the Subnational Level? By Kangave, Jalia; Mascagni, Giulia; Moore, Mick
  5. Does Informal Employment Respond to Growth Opportunities? Trade-Based Evidence from Bangladesh By Prodyumna Goutam; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
  6. Transitions Between Informal and Formal Employment Results from a Worker Survey in Bangladesh By Italo A. Gutierrez; Krishna B. Kumar; Minhaj Mahmud; Farzana Munshi; Shanthi Nataraj
  7. What Aspects of Formality Do Workers Value? Evidence from a Choice Experiment in Bangladesh By Minhaj Mahmud; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
  8. The dynamics of income inequality in a dualistic economy: Malawi from 1990 to 2011 By Giovanni Andrea Cornia; Bruno Martorano
  9. Business Formalization in Vietnam By Brian McCaig, Jordan Nanowski
  10. Market governance in Kinshasa: the competition for informal revenue through ‘connections’ (branchement) By Nkuku, Albert Malukisa; Titeca, Kristof
  11. Agglomeration Economies in the Presence of an Informal Sector The Colombian Case By García, Gustavo A.
  12. Reverting to Informality Unregistered Property Transactions and the Erosion of the Titling Reform in Peru By Italo A. Gutierrez; Oswaldo Molina

  1. By: Leandro Medina; Friedrich Schneider
    Abstract: We undertake an extended discussion of the latest developments about the existing and new estimation methods of the shadow economy. New results on the shadow economy for 158 countries all over the world are presented over 1991 to 2015. Strengths and weaknesses of these methods are assessed and a critical comparison and evaluation of the methods is carried out. The average size of the shadow economy of the 158 countries over 1991 to 2015 is 31.9 percent. The largest ones are Zimbabwe with 60.6 percent, and Bolivia with 62.3 percent of GDP. The lowest ones are Austria with 8.9 percent, and Switzerland with 7.2 percent. The new methods, especially the new macro method, Currency Demand Approach (CDA) and Multiple Indicators Multiple Causes (MIMIC) in a structured hybrid-model based estimation procedure, are promising approaches from an econometric standpoint, alongside some new micro estimates. These estimations come quite close to others used by statistical offices or based on surveys.
    Keywords: Shadow economy;Tax evasion;informal economy, survey, multiple indicators multiple Causes (MIMIC), comparison of different estimation methods, the light intensity approach, predictive mean matching (PMM), Other, Model Construction and Estimation, Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Structure and Scope of Government
    Date: 2018–01–24
  2. By: Mohammad Reza Farzanegan (University of Marburg); Bernd Hayo (University of Marburg)
    Abstract: Using Iranian-province-level data from 2001–2013, this study finds that the international sanctions of 2012/2013 had a significantly stronger negative impact on the growth rate of the shadow economy than they did on the official GDP growth rate. Thus, the international sanctions on Iran have damaged the informal economy even more than the formal economy.
    Keywords: shadow economy, sanctions, Iran
    JEL: F51 E26 O17
    Date: 2018
  3. By: William C. Boning; John Guyton; Ronald H. Hodge, II; Joel Slemrod; Ugo Troiano
    Abstract: Tax enforcement may affect both the behavior of those directly treated and of some taxpayers not directly treated but linked via a network to those who are treated. A large-scale randomized field experiment enables us to examine both the direct and network effects of letters and in-person visits on withheld income and payroll tax remittances by at-risk firms. Visited firms remit substantially more tax. Their tax preparers’ other clients also remit slightly more tax, while their subsidiaries remit slightly less. Letters have a much smaller direct effect and no network effects, yet may improve compliance at lower cost.
    JEL: C93 H26 L14
    Date: 2018–02
  4. By: Kangave, Jalia; Mascagni, Giulia; Moore, Mick
    Abstract: One of the most effective ways of increasing voluntary tax compliance is by improving tax morale. Several studies have been undertaken to examine why some individuals pay taxes while others do not. While many of these studies have been conducted at the national level, there is an increasing body of research at the subnational level. Three main methods are used to study tax morale: surveys, simulation exercises and field experiments. In this paper, we describe each of these methods, highlighting their strengths and weaknesses. We also examine their usefulness to tax administrators and policymakers wishing to increase tax compliance. We conclude that to get a better understanding of the factors that affect tax morale at the subnational level, more studies need to be undertaken. This should include studies that use qualitative methods to understand taxpayer behaviour. Lastly, studies should also investigate the variations between categories of individuals.
    Keywords: Finance, Politics and Power,
    Date: 2018
  5. By: Prodyumna Goutam; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
    Abstract: Informal employment accounts for the majority of employment in many developing countries, yet its relevance to growth, and its links with the formal sector, remain poorly understood. A widely held view is that informality eventually gives way to formality as countries develop. In this paper, we examine the effects of growth opportunities — in the form of export-induced demand in Bangladesh — on four types of employment: formal, casual, unpaid, and self-employment. At an aggregate level, export-induced demand increases the levels of all four types of employment. We also conduct a district-level analysis, constructing a shift-share measure of trade exposure that relies on national, industry-level variation in exports, coupled with pre-existing, district-level shares of employment by industry. We find that the direct impact of trade is to increase labor force participation and formal employment. When we also include the indirect impacts of trade, in the form of induced demand through supply chain linkages, we find an even larger impact on labor force participation. The results also suggest that trade triggers an immediate increase in both formal and casual employment, as well as a longer-run increase in self-employment. We conclude that labor response to growth opportunities such as trade is not limited to formal employment, and a more nuanced understanding of informality in the growth process is needed.
    Date: 2017–07
  6. By: Italo A. Gutierrez; Krishna B. Kumar; Minhaj Mahmud; Farzana Munshi; Shanthi Nataraj
    Abstract: We document transitions between different types of formal and informal employment using retrospective job histories from a new survey of 2,000 workers in two metropolitan areas of Bangladesh. We find that workers transitioning between jobs are most likely to remain in the same type of employment, but that there is substantial churn across employment types. Private wage employees are most likely to transition to a new job, and the observed changes in earnings and job benefits provide evidence of upward mobility. Nevertheless, we also find a non-trivial risk of downward mobility, especially for those transitioning into casual employment, which has the lowest level of earnings and benefits and the highest levels of exposure to workplace hazards and violence. Our results also suggest that self-employment is not always an activity of last resort. 30% of workers who leave private employment move to self-employment; among these workers, many quit voluntarily, and most report that they prefer it to wage employment. Overall, our findings suggest that there are elements of informal employment consistent with both the traditional view that it is a segmented portion of the labor market with few prospects of upward mobility, and the alternative view that it is a dynamic, entrepreneurial alternative to wage employment.
    Date: 2017–07
  7. By: Minhaj Mahmud; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
    Abstract: In this study, we use a choice experiment to elicit workers' willingness to pay (WTP) for specific job benefits typically associated with formal employment (contracts, termination notice, paid leave, preferred working hours, and access to a retirement account). We find that workers most value job stability: the average worker would be willing to give up 19 percent of monthly income for a 6-month contract, 27 percent for a 1-year contract and 44 percent for a permanent contract (relative to no contract). Thirty days' of termination notice would also be valued at about 12 percent of monthly income. Using a latent class model, we explore preference heterogeneity and find that government workers are more likely to place a higher value on long-term contracts than private sector employees, while casual workers are more likely to have a particularly strong preference for higher salary, and a relatively low WTP for various benefits. This heterogeneity may be driven by sorting or loss aversion. Our work also lends support to the use of choice experiments to overcome the challenges associated with estimating WTP for specific job benefits from hedonic wage regressions or from observed job durations.
    Date: 2017–07
  8. By: Giovanni Andrea Cornia (Dipartimento di Scienze per l'Economia e l'Impresa); Bruno Martorano
    Abstract: This paper aims to document and explain the evolution of inequality in Malawi over recent decades using data from various national and international sources. Inequality rose between 1968 and the late 1980s due to the agricultural export-led development model adopted by the Banda regime, which favoured the estate sector and medium-sized farms and thereby created a ‘dualism within the dualism’ that exacerbated the inequality inherited from the colonial era. Between the early 1990s and the mid-2000s, inequality declined, in part owing to the adoption of the Starter Pack programme which covered all smallholders and substantially strengthened maize production per capita, including among the poorest farmers. Finally, inequality rose again between 2004 and 2011. Applying a microdecomposition analysis, this paper shows that a key driver of the rise in inequality during this period was the suboptimal structural transition of the economy from a low-inequality crop agriculture to high-inequality sectors such as livestock production, commerce, transport and formal and informal services located in both urban and rural areas. Such suboptimal structural transition was in part due to the decline of manufacturing induced by the trade liberalization of the 1990s and the skewed distribution of the rise in incomes from livestock production.
    Date: 2017
  9. By: Brian McCaig, Jordan Nanowski (Wilfrid Laurier University)
    Abstract: We estimate the impact of business formalisation using nationally representative panel data on businesses in Vietnam. Our data allows us to observe businesses for two surveys prior to obtaining a license and hence to control for differential trends before formalisation. We find that obtaining a license is not associated with an increase in profits or other business outcomes such as revenue, expenses, and employment once we control for differential trends. Controlling for trends is crucial, as estimates that ignore trends consistently find a larger positive association between becoming licensed and business performance. Our results suggest that inducing more businesses to register is unlikely to bring about large-scale changes for these businesses.
    Keywords: Informal, Formalization, Asia, Vietnam, Household business
    Date: 2018–02–01
  10. By: Nkuku, Albert Malukisa; Titeca, Kristof
    Abstract: This paper analyses in detail the governance of urban markets in Kinshasa. By unpacking the complex relations of power which underpin these markets, the paper shows how informality is used as an instrument of accumulation by a variety of actors, which try to gain access to the revenue generated by the markets. Concretely, actors within and outside markets rely on a system called branchement, which refers to connections with higher-level authorities, allowing these actors to access their positions and revenue. Focusing on these connections, the paper draws the following main conclusions: first, market revenue is the site of an intense competition, in which particularly high-level political actors (with links to the Presidency) control revenue streams – rather than the Kinshasa provincial government (which has the legal right to do so). Second, these alliances are fragile and unstable: both changes at higher- as well as local-levels (i.e. the market) create a series of conflicts, in which actors try to re-affirm their position and access to revenue. Third, these connections rely on a variety of linkages – ethnicity, regional, clan – but particularly family- and financial linkages are important. Overall, the paper highlights the need and importance for analysing the informal vertical connections through which urban actors navigate their positions and income.
    Keywords: Kinshasa; market governance
    Date: 2018–02
  11. By: García, Gustavo A.
    Abstract: This paper analyzes the relationship between agglomeration economies and productivity in the context of a developing country while taking into account the marked presence of an informal sector. Using data from Colombia, we investigate the effect of agglomeration economies on formal and informal productivity. We examine whether the informal sector achieves benefits from agglomeration economies as well as whether there are differences between the formal and informal sectors in terms of agglomeration returns. We find that agglomeration economies, measured by the density of local employment, have a significantly positive effect on productivity in the informal sector, while there is little effect in the formal sector. We estimate an elasticity of wages with respect to employment density of approximately 2% for the informal sector, which implies that informal workers in denser areas will earn approximately 11% more than those in less dense areas.
    Keywords: Agglomeration economies, informal sector, Colombia
    JEL: R12 J31 R23
    Date: 2018–01–26
  12. By: Italo A. Gutierrez; Oswaldo Molina
    Abstract: Titling programs have focused mostly on providing initial tenure security and have not properly addressed maintaining the formality of future property transactions. Our data indicates that properties become de-regularized due to unregistered transactions in urban slums, which threatens to undo the success of the titling program in the long run. We exploit a natural experiment provided by the elimination of a streamlined registration system targeted for the poor residents in Peru to identify how costly and burdensome registration policies can increase de-regularization. Our analysis indicated that the elimination of such a system led to a significant reduction in the probability of registering transactions, including those that involved a change in ownership. Overall, our findings stress the necessity of building specific components aimed at maintaining properties formal into the design of urban titling programs.
    Keywords: titling programs, registration, property transactions, property rights, natural experiment, Peru
    JEL: P14 O18 R20 R28 K0
    Date: 2016–09

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