nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒10‒31
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informal Emissions By Burgi,Constantin Rudolf Salomo; Hovhannisyan,Shoghik; Joshi,Santosh Ram; Ahmad Famm Alkhuzam
  2. From Financial Development to Informality : A Causal Link By Capasso,Salvatore; Ohnsorge,Franziska Lieselotte; Shu Yu
  3. Re-thinking the Approach to Informal Businesses By Andreja Marusic; William Nielsen; Tania Ghossein; Sylvia Solf
  4. Labor Informality and Market Segmentation in Senegal By Rodriguez Castelan, Carlos; Vazquez, Emmanuel
  5. Informal Microenterprises in Senegal : Performance Outcomes and Possible Avenues to BoostProductivity and Jobs By Atiyas,İzak; Dutz,Mark Andrew
  6. Life Cycle Savings in a High-Informality Setting—Evidence from Pakistan By Joubert,Clement Jean Edouard; Kanth,Priyanka
  7. Property Tax Compliance in Tanzania : Can Nudges Help ? By Collin,Matthew Edward; Di Maro,Vincenzo; Evans,David K.; Manang,Frederik

  1. By: Burgi,Constantin Rudolf Salomo; Hovhannisyan,Shoghik; Joshi,Santosh Ram; Ahmad Famm Alkhuzam
    Abstract: Environmental regulations and their enforcement play a critical role in reducing emissions andtheir devastating effects on humanity and the environment. However, many developing countries have large informalsectors—accounting for more than 70 percent of total employment, that operate outside government control. Thepresence of the informal sector could have detrimental consequences on the environment as informal firms do notcomply with regulations, which could jeopardize the effectiveness of environmental policies. The paper usesreduced form equations to estimate the relationship between both CO2 and non-CO2 emissions per value added and theinformal sector measured as the share of informal workers in total across countries. The estimates indicate thatemissions per value added in the informal sector are higher as opposed to in the formal sector. At the sector level,higher informality is associated with lower CO2 emissions per value added only in manufacturing and other servicessectors. In particular, a one percentage point increase in the share of informal workers in total sector employmentreduces the CO2 emissions per value added by 1.44 percent in manufacturing and 1.773 percent in services. This impliesthat the magnitude of emissions per value added in the formal sector relative to the informal sector is ambiguous.Sector-specific estimations for non-CO2 emissions yield positive significant coefficients for agriculture, trade,mining, and utilities and a negative significant coefficient for manufacturing.
    Date: 2022–08–31
  2. By: Capasso,Salvatore; Ohnsorge,Franziska Lieselotte; Shu Yu
    Abstract: Financial development reduces the cost of accessing external financing and thus incentivizesinvestment in higher-productivity projects that allow firms to expand to the scale needed to operate in the formaleconomy. It also encourages participants of the informal sector to join the formal sector to gain access to creditand financial services. This paper documents two findings. First, countries with less pervasive informality areassociated with greater financial development. Second, the impact of financial development, and especially bankingsector development, on informality is causal. This causal link is established using a novel instrumental variable fordomestic financial development: financial development in other (neighboring) countries. The causal link betweeninformality and financial development is stronger in countries with greater trade openness and capital accountopenness. The findings are robust to alternative specifications.
    Date: 2022–09–27
  3. By: Andreja Marusic; William Nielsen; Tania Ghossein; Sylvia Solf
    Keywords: Private Sector Development - Business Environment Private Sector Development - Business in Development Private Sector Development - Enterprise Development & Reform Private Sector Development - Microenterprises Private Sector Development - Private Sector Economics
    Date: 2020–11
  4. By: Rodriguez Castelan, Carlos (World Bank); Vazquez, Emmanuel (Universidad Nacional de la Plata)
    Abstract: Understanding the selection of workers into informality is a policy priority to design programs to increase formalization across Sub-Saharan Africa, where nine out of ten workers are informal. This paper estimates a model of self-selection with entry barriers into the formal sector to identify the extent of involuntary informality in Senegal, a representative country in terms of levels of informality in West Africa and with one of the most rigid labor markets in the world. The results show that the desire of being formal is greater for workers with formal education, married, and a lower proportion of children younger than age five living in the household. The individual's preference for the formal sector also grows with age at a decreasing rate. The results also show that labor informality is mainly a voluntary phenomenon, with 30 percent of informal workers being involuntarily displaced into the informal sector. The results are robust to different model specifications, definitions of labor informality, and heterogeneous groups of workers.
    Keywords: labor informality, segmentation, labor markets, Senegal
    JEL: J42 J46 N37
    Date: 2022–09
  5. By: Atiyas,İzak; Dutz,Mark Andrew
    Abstract: This paper explores differences and similarities across formal and informal microenterprises inSenegal. It uses a new national sample of more than 500 firms, of which two-thirds are informal and over 95 percentare micro-size, employing five or fewer full-time employees. The analysis finds that formal firms have averageperformance outcomes that are in the range of three to five times higher than informal firms. Formal firms are also morelikely than informal firms on average to possess “good” characteristics, namely assets and uses of digitaltechnologies that are positively correlated with productivity, sales, exporting, and employment. Despitethese average differences, informal firms are highly heterogeneous, with a sizable number similar to formal firmsin terms of both performance outcomes and good characteristics: the share of informal firms in the topproductivity and sales deciles having good characteristics is substantial, and one-third of all firms in thehigh-performance cluster based on a data-driven combination of the four performance variables are informal firms.Importantly, several characteristics that are correlates of better performance (being in the top two clusters) forinformal firms are identical to those for all firms in the high-performance cluster: having electricity, having had aloan, and in terms of uses of digital technologies, having a smartphone and using a mobile phone to communicate withsuppliers and customers. However, a sizable number of high-performance informal firms are lagging in terms of good characteristics. That roughly half of formal firms and noinformal firm had a loan implies that it is possible to be in the top performance cluster even without having access tosuch formal financing. That over half of formal firms in the top cluster as well as in the top decile of productivity andsales use inventory control/point of sales software as a management tool while only one informal firm does is bothindicative of the small number of informal firms that use these technologies and suggestive of the potential forperformance improvements if such technologies were used more widely.
    Date: 2022–06–29
  6. By: Joubert,Clement Jean Edouard; Kanth,Priyanka
    Abstract: The combined forces of population aging, weakening family and village risk-sharing networks,and low formal pension coverage will make financing elderly consumption a major challenge for the future. This studyexamines whether households in high-informality settings, where participation in pension schemes is rare, accumulatewealth over the life cycle and what mix of assets and liabilities composes that wealth. Pakistan is an idealsetting, with 88.5 percent of the population in informal employment and limited wide-scale social protectiontargeting the elderly. Data on housing wealth, land holdings, financial wealth, household durables, and ownedbusinesses are assembled from eight rounds of representative household surveys that span 18 years (2001–18). Changesassociated with age are disentangled from differences between cohorts and year effects by applying decompositionanalysis. The average informal Pakistani household accumulates 4.2 years’ worth of consumption between thehead’s ages of 25 and 65, mostly in the form of residential housing. Wealth accumulation is slower early in the lifecycle and picks up speed between ages 40 and 65. Land is an important part of rural households’ portfolio but growslittle over the life cycle (10 months’ worth). More liquid forms of wealth such as financial wealth also grow with age,but in much more modest amounts. Overall, consistent with improving living standards and expectations that familysupport may be less available than in the past, the fraction that reaches old age with significant net worth hasincreased over the period analyzed, suggesting a potential demand for long-term saving schemes designed for theinformal sector.
    Date: 2022–07–07
  7. By: Collin,Matthew Edward; Di Maro,Vincenzo; Evans,David K.; Manang,Frederik
    Abstract: Low tax compliance in low- and middle-income countries around the world limits the abilityof governments to offer effective public services. This paper reports the results of a randomly rolled out textmessage campaign aimed at promoting tax compliance among landowners in Dar es Salaam, Tanzania. Landowners wererandomly assigned to one of four groups designed to test different aspects of tax morale. They received a simple textmessage reminder to pay their tax (a test of salience), a message highlighting the connection between taxes and publicservices (reciprocity), a message communicating that people who did not pay were not contributing to local or nationaldevelopment (social pressure), or no message (control). Recipients of any message were 18 percent (or 2 percentagepoints) more likely to pay any property tax by the end of the study period. Each type of message resulted in gains inpayment rates, although social pressure messages delivered the lowest gains. Total payment amounts were highest forthose who received reciprocity messages. Nudges were most effective in areas with lower initial rates of taxcompliance. The average estimated benefit-cost ratio across treatments is 36:1 due to the low cost of the intervention,with higher cost-effectiveness for reciprocity messages.
    Date: 2022–08–22

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