nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒08‒19
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Effectiveness of Interventions to Reduce Informality in Low- and Middle Income Countries By Jessen, Jonas; Kluve, Jochen
  2. Integration into formal enterprise space: Challenges and opportunities for informal sector entrepreneurs By KOSHY, PERUMAL
  3. Small And Medium Entreprise Policy Reforms And Formalization Performance In Nigeria By Friday K. Ohuche
  4. Inferring Tax Compliance from Pass-through: Evidence from Airbnb Tax Enforcement Agreements By Andrew J. Bibler; Keith F. Teltser; Mark J. Tremblay

  1. By: Jessen, Jonas (DIW Berlin); Kluve, Jochen (Humboldt University Berlin, RWI)
    Abstract: Labor markets in low- and middle income countries are characterized by high levels of informality. A multitude of interventions have therefore been implemented in many countries with the objective to increase the formalization of firms and workers, including information campaigns, simplification of registration procedures, reductions of payroll taxes and social security contributions, and interventions that enforce labor or business formalization. In this paper, we compile a database of 157 impact estimates from 32 academic studies that evaluate empirically one or more of these formalization interventions. The empirical analysis correlates the impact estimates of the primary studies — given as either (i) a measure of sign and statistical significance or (ii) the effect size — with explanatory factors such as the intervention type, the outcome variable, the scope of the intervention (program or policy), and other covariates. Several key findings emerge: first, the intervention type is not a strong determinant for the effectiveness of formalization interventions, though tax incentives and labor inspection are most likely to display significant positive effects. Second, the outcome "worker registration" shows significantly better results than other outcomes. Third, interventions at scale — i.e. formalization "policies" — are more effective on average than singular "programs".
    Keywords: formalization, labor registration, business registration, impact evaluation
    JEL: C40 J08 J48
    Date: 2019–07
    Abstract: A vast majority of micro and small enterprises (MSEs) operate in an informal enterprise space, functioning without the required legal and regulatory approvals, notwithstanding crucial role that they play in job creation, poverty alleviation, exports, and regional economic development. Living in an informal enterprise space is not a choice, but forced reality brought on by regulatory burdens, complex compliance structures, and an inefficient and slow-moving government system. This article looks at the informal MSME sector in terms of the challenges and opportunities on its route to formalization. It highlights some of these important aspects, which facilitates the transition into formal enterprise space. IT has provided inputs resulting from interactions with entrepreneurs, associations, and NGOs working in the informal MSME space. The study was also supplemented by secondary source materials. Some of the sectors that have been evaluated are waste management and recycling, last-mile public transport connectivity operators, handloom weavers, potters and street food vendors.
    Keywords: Informal Enterprises, Micro Businesses, SMEs, India, Rural small scale
    JEL: L26 L5 L51 L53 R0
    Date: 2019–01
  3. By: Friday K. Ohuche (Governors Department, Central Bank of Nigeria)
    Abstract: In this study we employ the “Difference Principle” approach to evaluate the costs and benefits of firms transiting from an informal to formal sector (Formalization). We focus on both the differential impacts and effectiveness of policy reforms such as microfinance policy and other related micro-enterprise policies aimed at attracting informal firms into the formal sector. Introduction of Institutional reforms presupposes that firms in the informal sector maximizes a given welfare condition which acts as an incentive to formalize.
    Keywords: Small and Medium Enterprises, Difference Principle Approach, Policy.
    JEL: R10
    Date: 2018–06
  4. By: Andrew J. Bibler; Keith F. Teltser; Mark J. Tremblay
    Abstract: Tax enforcement can be prohibitively costly when market transactions and participants are difficult to observe. Evasion among market participants may reduce tax revenue and provide certain types of suppliers an undue competitive advantage. Whether efforts to fully enforce taxes are worthwhile depends on the rate of compliance in the absence of such efforts. In this paper, we show that an upper bound on pre-enforcement tax compliance can be obtained using market data on pre- and post-enforcement periods. To do this, we estimate the pass-through of tax enforcement agreements between Airbnb and state and local governments, which achieve full compliance at the point of sale. Using data on Airbnb listings across a number of U.S. metropolitan areas, as well as variation in enforcement agreements across time, location, and tax rate, we estimate that taxes are paid on no more than 24 percent of Airbnb transactions prior to enforcement. We also find that demand is inelastic, which drives several key insights: the economic burden of taxation disproportionately falls on renters, excess burden is very small, and tax enforcement is not an effective policy lever for interest groups seeking to reduce local Airbnb activity.
    Keywords: evasion, short-term housing rentals, sharing economy, voluntary collection agreements, online sales and use taxes
    JEL: H20 H22 H26 L10
    Date: 2019
  5. By: Simplice A. Asongu, Phd (Department of Economics, University of South Africa); Nicholas M. Odhiambo (Department of Economics, University of South Africa)
    Abstract: This study investigates whether information sharing channels that are meant to reduce information asymmetry have led to an increase in financial access. The study employs a Generalised Method of Moments technique using data from 53 African countries during the period from 2004-2011 to examine this linkage. Information sharing channels are theoretically designed to promote the formal financial sector and discourage the informal financial sector. The study uses two information sharing channels: private credit bureaus and public credit registries.
    Keywords: Information asymmetry; Financialisation; Financial Access; Africa
    JEL: R10
    Date: 2018–06

This nep-iue issue is ©2019 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.