nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒09‒23
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax audits as scarecrows. Evidence from a large-scale field experiment By Marcelo Bérgolo; Rodrigo Ceni; Guillermo Cruces; Matías Giaccobasso; Ricardo Pérez-Truglia
  3. Tax Evasion and Missing Imports: Evidence From Transaction-Level Data By Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia
  4. Social Security Reform in the Presence of Informality By Kathleen McKiernan
  5. Dynamics of social networks of urban informal entrepreneurs in an African economy By Jean-Philippe Berrou; Claire Gondard-Delcroix
  6. Culture and authenticity: regulating shadow economy to foster market growth By Daskalopoulou, Irene F.
  7. Gray Zones: Slums and Urban Structure in Developing Countries By Tiago Cavalcanti; Daniel da Mata; Marcelo dos Santos

  1. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Rodrigo Ceni (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Guillermo Cruces (Universidad Nacional de La Plata (Argentina). Facultad de Ciencias Económicas. Centro de Estudios Distributivos, Laborales y Sociales.); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Ricardo Pérez-Truglia (Universidad de California en Los Angeles (EEUU))
    Abstract: The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay’s tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measured the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, based on administrative data. We find that providing information about audits had a significant effect on tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model, risk-as-feelings, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way that scarecrows frighten off birds.
    Keywords: tax, evasion, audits, penalties, frictions
    JEL: C93 H26 K34 K42 Z13
    Date: 2019–06
  2. By: Sarah Clifford; Panos Mavrokonstantis
    Abstract: We study behavioural responses to a widely-used tax enforcement policy that combines ele¬ments of self- and third-party reporting. Taxpayers self-report to the tax authority but must file documentation issued by a third-party to corroborate their claims. Exploiting salary-dependent cutoffs governing documentation requirements when claiming deductions for charitable contribu¬tions in Cyprus, we estimate that deductions increase by £0.7 when taxpayers can claim £1 more without documentation. Second, using a reform that retroactively shifted a threshold activating documentation requirements, we estimate that at least 64% of the response is purely a reporting adjustment. Finally, reporting thresholds affect the responsiveness to tax subsidies.
    Keywords: Tax enforcement, Tax compliance, Charitable giving, Tax design
    Date: 2019–08–14
  3. By: Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia
    Abstract: It is well documented in the literature that developing countries raise less tax revenue as a share of their economy than their developed counterparts. Part of this gap can be explained by the relatively higher tax evasion in the former. Recent literature shows that increasing the availability of information reduces evasion, by increasing the probability of detection. However, there is little evidence to show how tax evasion responds to changes in tax rates. Using highly disaggregated trade data, we show that there is more tax evasion when tax rates increase. However, this relationship only holds when we use the de facto effective tax rate, rather than the de jure effective tax rate. We also find that evasion takes place through under-reporting of the value of imports, as well as mislabelling highly-taxed products as similar lower-taxed products. Finally, we show that when trade costs are ignored, the level of evasion is underestimated; the degree of underestimation in the elasticity estimate depends on the way the trade cost is included in the estimation.
    Keywords: Economic Development, Finance, Governance,
    Date: 2019
  4. By: Kathleen McKiernan (Vanderbilt University)
    Abstract: As populations age, countries across the globe are dealing with the issue of how to fund retirement consumption for their workers. The design of Social Security programs is more difficult when the country also exhibits an informal economy in which workers avoid the taxation of the government and are not entitled to its benefits. In this paper, I study the example of Chile–a country that transitioned from a pay-as-you-go Social Security system to a system of private, individual retirement accounts in 1981 and also exhibits a significant informal sector– in order to quantify the transitional welfare impact of Social Security privatization when workers have the option to evade the public system through informality. I construct an OLG model which allows households to split working time between a taxed formal sector, an un-taxed informal sector, and home production. I find large long-run welfare gains of roughly 10 and 15 percent for low and high-productivity workers, respectively. However, these gains come at the expense of losses for two groups: those low-productivity workers who are retired at the time of the reform and those high-productivity workers within 5 years of retirement at the time of the reform. The presence of informality has two conflicting impacts: (1) including an outside option to formal work leads to smaller long-run transfers as government revenue is lower due to substitution from the formal to the informal sector, and (2) the privatization of the Social Security system causes wage growth that informal workers can receive without facing the distortions of any remaining taxation. Quantitative results indicate that these conflicting effects roughly cancel one another out and lead to long-run welfare gains that are similar to those in an economy without informality.
    Date: 2019
  5. By: Jean-Philippe Berrou (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique, LAM - Les Afriques dans le monde - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, IEP Bordeaux - Sciences Po Bordeaux - Institut d'études politiques de Bordeaux); Claire Gondard-Delcroix (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper carries out an analysis of the formation and transformation of social relations and networks of access to resources in the professional trajectory of micro-entrepreneurs operating in an urban informal African economy. The analysis of social networks is rooted in Granovetter's structural embeddedness framework combined with the dynamic and discursive conception of social relations of Harisson White (embeddedness and decoupling). Life stories of micro and small entrepreneurs in Bobo-Dioulasso (Burkina-Faso) are analyzed by mixing qualitative and quantitative methods. Results suggest that the construction of social networks and interpersonal relations of access to resources is a long-term process. A co-construction of social networks and economic activity is observed; it challenges the argument that social capital is a substitute for a lack of personal resources. The growth of small and micro activities is linked to the professionalization and stabilization of a social network, and even to the institutionalization of access to resources.
    Keywords: Embeddedness,Social Networks,Informal economy,Entrepreneurial stories,Mixed methods JEL Classification
    Date: 2018–01–09
  6. By: Daskalopoulou, Irene F.
    Abstract: Competition in the cultural and creative industries is much dependent upon product and service differentiation. Differentiation is about the unique features that are embedded in the cultural products themselves. These unique features relate to and determine, the value that consumers ascribe to cultural products. Authenticity is commonly used to underlie the uniqueness of a cultural product and is thus a sign of a thing worthy of admiration. Within this context the current study undertakes a comparison of practices related to the way in which authenticity in the paintings’ market is handled. The aim is to sketch policy interventions for effectively regulating the shadow economy in this market. It is argued that good regulations are necessary and if enforced, positive outcomes in terms of the paintings’ market turnover and employment levels might be generated. In particular, we discuss interventions that would transform the threat of an illegal fake market into an opportunity for market growth through the development of a ‘parallel authentic copy market’. Under certain conditions such a policy intervention could have direct and indirect positive effects via: a) the incorporation of an important part of the activities of the shadow economy in the official market, b) the use of a parallel market to protect consumers and their welfare and c) the use of the parallel market to strategically foster growth in the cultural industry at large. Given the economic significance of the cultural industries at both the national and the EU level and the commitment of the later to support the industry’s growth insights, as to how we might best regulate the market in line with such directions, are critical.
    Keywords: authenticity, cultural industries, creative industries, economic policy, market regulation, shadow economy
    JEL: L52 M31 Z18
    Date: 2019–08–30
  7. By: Tiago Cavalcanti (University of Cambridge); Daniel da Mata (Sao Paulo School of Economics); Marcelo dos Santos (Insper)
    Abstract: Slums are prevalent in many developing country cities and are a critical feature of their landscape. Slums are characterized by the lack of well defined property rights and by precarious public infrastructure, such as access to improved water and sanitation. However, they allow poor households to live in the city close to where they work and enjoy agglomeration externalities. We investigate how slums are formed and how different urban related policies affect the structure of a city. We build a dynamic spatial environment in which agents are heterogenous in their labor productivity and they endogenously choose where and the type of housing mode (formal or informal) they live. We fit the model such that key macro and micro level moments of the city of Sao Paulo in Brazil are matched. We then implement counterfactual exercises to assess the role of urban land use and transportation policies on the city landscape and welfare of their citizens. We show that some policies can have non-trivial effects. For instance, a fall in transportation costs rises the overall efficiency of the city, which attracts more households to the city. Immigration from rural households increases house prices and lead to a substantial rise in slums on the border of the city. We also show that given the land use in a city, slums can be persistent over time even when the city adopts urban policies to foster formal housing.
    Date: 2019

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.