nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒07‒18
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. A new social contract inclusive of informal workers By Martha Alter Chen; Sophie Plagerson; Laura Alfers
  2. The COVID-19 crisis and the South African informal economy: A stalled recovery By Michael Rogan; Caroline Skinner
  3. Aging, Inadequacy and Fiscal Constraint: The Case of Thailand By Phitawat Poonpolkul; Ponpoje Porapakkarm; Nada Wasi
  4. Norms, enforcement, and tax evasion By Besley, Timothy; Jensen, Anders Ditlev; Persson, Torsten
  5. Tax Knowledge and Tax Manipulation: A Unifying Model By Ashley C. Craig; Joel Slemrod
  6. Tax Evasion by Firms By Laszlo Goerke
  7. The Race Between Tax Enforcement and Tax Planning: Evidence From a Natural Experiment in Chile By Sebastián Bustos; Dina Pomeranz; Juan Carlos Suárez Serrato; José Vila-Belda; Gabriel Zucman
  8. The wall street stampede: exit as governance with interacting blockholders By Cvijanović, Dragana; Dasgupta, Amil; Zachariadis, Konstantinos
  9. Vicious Cycle of Poverty in Haor Region of Bangladesh- Impact of Formal and Informal Credits By Nazrul Islam
  10. The Welfare Effects of Law Enforcement in the Illegal Money Lending Market By Leong, Kaiwen; Li, Huailu; Pavanini, Nicola; Walsh, Christoph

  1. By: Martha Alter Chen; Sophie Plagerson; Laura Alfers
    Abstract: This paper makes the case that current social contracts are often inadequate, irrelevant, or unjust for informal workers. It outlines three possible future scenarios: the bad old contract, an even worse contract, and a better new contract. Under the bad old contract, informal workers lacked legal recognition, were stigmatized and penalized, and were excluded as partners. The intensification of predatory capitalism, repressive state policies and the collusion of state and capital, in the wake of the COVID-19 pandemic recession, makes the possibility of a worse new deal all too real.
    Keywords: Informal work, Informal economy, Social contract, State, Capital
    Date: 2022
  2. By: Michael Rogan; Caroline Skinner
    Abstract: This paper seeks to identify the differentiated impacts of the crisis on specific groups of informal workers. The analysis draws on official nationally representative labour force surveys collected quarterly by South Africa's national statistical agency (Statistics South Africa).
    Keywords: COVID-19, South Africa, Informal, Informal economy, labour markets
    Date: 2022
  3. By: Phitawat Poonpolkul; Ponpoje Porapakkarm; Nada Wasi
    Abstract: Over the coming decades, many developing countries are set to face unprecedented challenges. While their population is aging extremely fast, the old-age income supports are inadequate and fiscal resources are limited. This study develops an overlapping generations model (OLG) with formal and informal sectors for a middle-income country. Besides aging population structure overtime, the model incorporates common features of developing countries—a sizable informal sector, a connectedness between the formal and informal sectors, and inadequate pension provisions. The households are heterogeneous with respect to their education, formality status, and survival probabilities. The model is calibrated to Thailand’s economy where the government budget structure is based on the country’s fiscal historical data, and the basic universal pension scheme and Social Security scheme are realistically specified. We assess the costs of these two schemes under three long-run scenarios: (i) introducing indexation to the currently non-indexed schemes; (ii) triple increasing the basic pension scheme; and (iii) specifying the basic pension to proportionally decrease with the Social Security benefits. Using a consumption tax to quantify the costs, the consumption tax must be increased by three, eleven and nine percentage points from the current level, respectively. The Social Security scheme is projected to be unsustainable, with its fund depleted in 2045. Without any reform and benefit cuts, the scheme requires a drastic increase in the contribution rate. Welfare gains and losses across household types and redistributive impacts of the reforms are discussed.
    Keywords: Overlapping generations model; Fiscal sustainability; Pension; Social Security; Thailand
    JEL: J1 H55 I38
    Date: 2022–06
  4. By: Besley, Timothy; Jensen, Anders Ditlev; Persson, Torsten
    Abstract: This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. The evidence is consistent with the model's main predictions on the dynamics of evasion.
    JEL: J1 C1
    Date: 2021–10–15
  5. By: Ashley C. Craig; Joel Slemrod
    Abstract: We provide a unified analysis of taxation and taxpayer education when individuals have an incomplete understanding of a complex tax system. The analysis is independent of whether income is earned legitimately, or by avoiding or evading taxes. In this sense, learning about tax minimization strategies (tax manipulation) is isomorphic to learning about tax rates. The government in our model balances a trade-off: A better understanding of the tax system potentially allows taxpayers to optimize more effectively, but also affects government revenue. Optimal taxpayer education and the optimal amount of redistribution can both be characterized by aggregate sufficient statistics, which do not require information about how biases or behavioral responses vary across the decision margins. We provide similarly simple rules for how tax rates on different income-generating activities should be set relative to each other.
    JEL: H2 H21 H26
    Date: 2022–06
  6. By: Laszlo Goerke (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: This contribution surveys theoretical analyses of tax evasion by firms. It uses a simple model in which the firm determines economic activity and the under-declaration of the tax base to integrate various approaches into a coherent analytical framework. Initially, the chapter characterises the basic features of the firm's decision. Subsequently, it considers the effects of firm-size heterogeneity, restrictions on evasion behaviour, the co-existence of tax evasion with other illegal activities, output market interactions, non-profit objectives, and corporate governance issues.
    Keywords: Firm, Tax Avoidance, Tax Evasion
    JEL: H25 H26 K34
    Date: 2022–05
  7. By: Sebastián Bustos; Dina Pomeranz; Juan Carlos Suárez Serrato; José Vila-Belda; Gabriel Zucman
    Abstract: Profit shifting by multinational corporations is thought to reduce tax revenue around the world. We analyze the introduction of standard regulations aimed at limiting profit shifting. Using administrative tax and customs data from Chile in difference-in-differences event-study designs, we find that the reform was ineffective in reducing multinationals’ transfers to lower-tax countries and did not significantly raise tax payments. At the same time, interviews with tax advisors reveal a drastic increase in tax advisory services. The qualitative interviews also allow us to identify and then quantitatively confirm a common tax planning strategy in response to the reform. These results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers.
    JEL: H25 H26 H32
    Date: 2022–06
  8. By: Cvijanović, Dragana; Dasgupta, Amil; Zachariadis, Konstantinos
    Abstract: Public transport services in Kampala city are largely made up of minibus and motorbike taxis. • While the current transport sector provides a critical means of livelihood to many individuals in the city, the jobs offered are relatively low-paid and the job market is increasingly saturated. • Given the limited potential for the current transportation industry to provide sustainable livelihoods for those in the sector, and the challenges presented by the sector on productivity and liveability of the city, there is a clear need for policy to better regulate transport operations. • Several cities have attempted to target the informal and semi-formal transport sector to improve city-wide connectivity, ranging from outright bans to upgrading of the informal system. • This brief compares four broad policy directions cities have adopted when interacting with informal transport providers and highlights key lessons to inform informal transport reform in Kampala.The growth of the asset management industry has made it commonplace for rms to have multiple institutional blockholders. In such rms, the strength of governance via exit depends on how blockholders react to each other's exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder's exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.
    Keywords: institutional investors; competition for flow; governance via exit; correlated trading; ES/S016686/1; Paul Woolley Centre at the LSE; Elsevier deal
    JEL: G23 G24
    Date: 2022–03–15
  9. By: Nazrul Islam
    Abstract: This research attempts to explore the key research questions about what are the different microcredit programs in Haor area in Bangladesh? And do microcredit programs have a positive impact on livelihoods of the clients in terms of selected social indicators viz. income, consumption, assets, net worth, education, access to finance, social capacity, food security and handling socks etc. in Haor area in Bangladesh? Utilizing difference-in-difference and factor analysis, we explore the nature and terms of conditions of available formal and informal micro-creditss in Haor region of Bangladesh; and investigate the impact of micro-creditss on the poverty condition of Haor people in Bangladesh. The findings showed that total income of borrowers has been increased over non-borrowers (z=6.75) significantly. Among the components of income, non-agricultural income has been increased significantly on the other hand income from labor sale has been decreased significantly. Total consumption expenditure with its heads of food and non-food consumption of both formal borrowers and informal borrowers have been increased over the period 2016-2019 significantly. Most of the key informants agreed that the findings are very much consistent with prevailing condition of micro-credits in Haor region. However, some of them raised question about the impacts of micro-credits. They argued that there is no straightforward positive impact of micro-credits on poverty condition of the households.
    Date: 2022–06
  10. By: Leong, Kaiwen (Nanyang Technological University, Singapore); Li, Huailu (Fudan University, China); Pavanini, Nicola (Tilburg University); Walsh, Christoph (Tilburg University)
    Abstract: We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the welfare effects of alternative law enforcement strategies. We find that a large enforcement crackdown that occurred during our sample period raised interest rates, lowered the volume of loans, increased the lenders' unit cost of harassment, decreased lender profits, and decreased borrower welfare. We compare this strategy to targeting borrowers and find that targeting medium-performing borrowers is the most effective at lowering lender profits.
    Keywords: illegal money lending, loan sharks, law enforcement, crime
    JEL: K42 G51
    Date: 2022–06

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