nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒05‒30
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Dynamics of Tax Compliance By Francesco Pappadà
  2. International enforcement cooperation and leadership against profit shifting By Chen, Xuyang; Hindriks, Jean
  3. Corruption in Customs By Cyril Chalendard; Ana Margarida Fernandes; Gael Raballand; Bob Rijkers
  4. An empirical equilibrium model of formal and informal credit markets in developing countries By Fan Wang
  5. The impact of Microfinance Institutions on the Informal Economy in Nigeria By Osuagwu, Eze Simpson; Hsu, Sara; Adesola, Ololade
  6. Livelihood Volatility in the Urban Labour Market: Reflections from India’s PLFS Data (2017-18) By Arup Mitra; Puneet Kumar Shrivastav; Guru Prakash Singh

  1. By: Francesco Pappadà (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Banque de France - Banque de France - Banque de France)
    Abstract: The literature on tax compliance has focused on its level but little is known about its dynamics. This paper shows that fluctuations in tax compliance are driven by changes in the state of the economy and the response of tax compliance to them. Tax compliance is markedly volatile and there are large differences in such volatility across countries. A large fraction of these differences (about 70%) is explained by different responses of tax compliance to tax changes and output fluctuations.
    Keywords: Tax compliance,Volatility,Fiscal policy
    Date: 2022–04
  2. By: Chen, Xuyang (Université catholique de Louvain, LIDAM/CORE, Belgium); Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: Market asymmetry between large and small countries induces tax gap that triggers profit shifting and base erosion from multinationals. Tax enforcement is the alternative to tax coordination to limit profit shifting. However, the lack of enforcement coordination makes the fight against profit shifting less effective. We consider a game in which countries differ both in (market) size and enforcement productivity (enforcement elasticity of tax revenue). Countries seek to maximize welfare (tax revenue net of enforcement cost), choosing first their enforcement level to limit profit shifting before competing in taxes. We find that enforcement leadership Pareto dominates simultaneous enforcement choices, and that the low-enforcement productivity country would be the leader. In line with the OECD/G20 BEPS project, we analyze the scope for international enforcement cooperation. We establish that Nash bargaining over enforcements (with countries competing in taxes) induces higher enforcement, tax and revenue for each country, and that the benefit of enforcement cooperation is larger for the low-enforcement productivity country. We then analyze the minimum tax reform showing that it achieves a Pareto improvement both under cooperative and non-cooperative enforcement.
    Keywords: Leadership, Tax enforcement, Profit shifting, Minimum tax
    JEL: H30 H87 C72
    Date: 2021–09–29
  3. By: Cyril Chalendard; Ana Margarida Fernandes; Gael Raballand; Bob Rijkers
    Abstract: This paper presents a new methodology to detect corruption in customs and applies it to Madagascar’s main port. Manipulation of assignment of import declarations to inspectors is identified by measuring deviations from random assignment prescribed by official rules. Deviant declarations are more at risk of tax evasion, yet less likely to be deemed fraudulent by inspectors, who also clear them faster. An intervention in which inspector assignment was delegated to a third party validates the approach, but also triggered a novel manifestation of manipulation that rejuvenated systemic corruption. Tax revenue losses associated with the corruption scheme are approximately 3 percent of total taxes collected and highly concentrated among a select few inspectors and brokers.
    Keywords: corruption, tax enforcement, tariff evasion, trade policy
    JEL: F13 D73 H26
    Date: 2021
  4. By: Fan Wang
    Abstract: I develop and estimate a dynamic equilibrium model of risky entrepreneurs' borrowing and savings decisions incorporating both formal and local-informal credit markets. Households have access to an exogenous formal credit market and to an informal credit market in which the interest rate is endogenously determined by the local demand and supply of credit. I estimate the model via Simulated Maximum Likelihood using Thai village data during an episode of formal credit market expansion. My estimates suggest that a 49 percent reduction in fixed costs increased the proportion of households borrowing formally by 36 percent, and that a doubling of the collateralized borrowing limits lowered informal interest rates by 24 percent. I find that more productive households benefited from the policies that expanded borrowing access, but less productive households lost in terms of welfare due to diminished savings opportunities. Gains are overall smaller than would be predicted by models that do not consider the informal credit market.
    Date: 2022–04
  5. By: Osuagwu, Eze Simpson; Hsu, Sara; Adesola, Ololade
    Abstract: This paper investigates the impact of microfinance institutions on the informal sector of the Nigeran economy drawing from a cross-sectional data of 14,189 customers from two major microfinance clusters – the Self-Reliance Economic Advancement Programme (SEAP) and ASHA Microfinance Bank Limited with a combined membership of over 700,000 clients. The study applies a descriptive and fully modified ordinary least square (FMOLS) model to evaluate the statistical relationship on average monthly borrowing amount and explanatory variables of factors that could affect the ability of clients to seek support from the various microfinance institutions. Empirical evidence suggests that amount of money borrowed by clients is significantly affected by the nature of business; whether the business is operating in the formal or informal sector, gender of the entrepreneur, and on the other hand whether the degree of borrowing is strongly affected by monthly household expenses of borrowers. The paper therefore concludes that the informal sector is largely supported by micro finance institutions but seeks a policy redirection for government to take steps to formalize the large stream of informal borrowers in order to improve domestic resource mobilization and actualize sustainable development of the Nigerian economy.
    Keywords: Microfinance, Informal Economy, Domestic Resource Mobilization, Sustainable Development, Nigeria
    JEL: D1 D14
    Date: 2021–06
  6. By: Arup Mitra; Puneet Kumar Shrivastav; Guru Prakash Singh (Institute of Economic Growth, Delhi)
    Abstract: This study aims at capturing the labour market volatility which is conceptualized in terms of the lack of sustainable sources of livelihood round the year. Though we are not able to identify the number of times workers change their jobs, the change in the job status which cannot occur unless the job changes, unravel important findings as retrieved from the quarterly repeated surveys of the same households. Two sets of multinomial logit model, representing labour market outcomes and the number of times of change in the type of employment (job status), and the wage function estimated after overcoming the endogeneity bias, bring out the susceptibility of the lower castes, illiterates and those belonging to the large households. The urban informal economy is subjected to income volatility which is connected to employment instability. In fact, the anomalies of the informal economy are not confined to meagre earnings only; the fluctuations reflect greater vulnerability.
    Date: 2021–01

This nep-iue issue is ©2022 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.