nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒12‒12
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Can ethics change? Enforcement and its effects on taxpayer compliance By James Alm; Matthias Kasper; Erich Kirchler
  2. Declaring income versus declaring taxes in tax compliance experiments: Does the design of laboratory experiments affect the results? By Stephan Muehlbacher; Andre Hartmann; Erich Kirchler; James Alm
  3. Using behavioural economics to understand tax compliance By James Alm; Matthias Kasper
  4. Income Tax Credits for Consumer Services: A Tool for Tackling VAT Evasion? By Thiess Büttner; Boryana Madzharova; Orlando Zaddach
  5. Aint that a Shame : False Tax Declarations and Fraudulent Benefit Claims By Barile, Lory; Cullis, John; Philip Jones
  6. Structural change(s) in Ghana: A comparison between the trade, formal and informal sectors By Bernardo Caldarola
  7. Inequality, Income Dynamics, and Transitions of Mexican Workers By Puggioni Daniela; Calderón Mariana; Cebreros Alfonso; Fernández León; Inguanzo José A.; Jaume David
  8. Female Entrepreneurship in Dakar: A Multidimensional Approach Where the Entrepreneurial Culture Reflects the Sociological Diversity of Female Entrepreneurs in Dakar By Rafik Abdesselam; Jean Bonnet; Ibrahima Dia
  9. Unbalanced Investments: Accra’s Informal Settlements By Hsi-Chuan Wang

  1. By: James Alm (Tulane University); Matthias Kasper (University of Vienna); Erich Kirchler (University of Vienna)
    Abstract: ‘How does tax enforcement affect taxpayer compliance, especially via its effects on tax morale and taxpayer ethics? In this paper we discuss the role of ethics and tax morale in compliance decisions and the effect of enforcement on these notions. We first discuss the factors that shape tax morale and ethics, using these terms as interchangeable concepts. We then summarize prior research that investigates how enforcement affects tax compliance. Subsequently, we discuss how tax morale and ethics shape behavioral responses to enforcement. Finally, we present administrative strategies to mitigate the negative effects of enforcement on compliance via its effects on tax morale and ethics.
    Keywords: Tax compliance; general deterrence; specific deterrence; tax morale; ethics
    JEL: C9 H26 H83
    Date: 2022–11
  2. By: Stephan Muehlbacher (Karl Landsteiner University of Health Sciences); Andre Hartmann (University of Vienna); Erich Kirchler (University of Vienna); James Alm (Tulane University)
    Abstract: Laboratory experiments are frequently criticised, in part because of the sensitivity of the results to specific features of the design. This paper addresses an important question regarding the key aspect of the experimental environment: How should the dependent variable – participants’ choices – be operationalised? For the specific context of laboratory research on income tax compliance, we compare the effects of the two most common operationalisation types: the declaration of gross income versus the declaration of tax payment. It is found that compliance is higher when participants indicate their tax payment than when they declare their income. It is also discovered that the effects of the three policy parameters of the economic model (tax rate, audit probability, and fine rate) are stronger when participants declare their taxes than when they declare their income. These results are relevant for interpreting prior and future experimental evidence on tax compliance and can explain some contradictory previous findings. More broadly, this study suggests that the results of laboratory experiments may depend on specific features of the experimental design, which proposes a strong need for more systematic methodological research.
    Keywords: Laboratory experiments; experimental design; tax compliance; tax rate; audit probability; fine rate
    JEL: B41 C90 C91 H26
    Date: 2022–11
  3. By: James Alm (Tulane University); Matthias Kasper (University of Vienna)
    Abstract: ‘Behavioural economics’, or the application of methods and evidence from other social sciences to economics, has increased greatly in significance and use in the last two decades. In this paper we discuss the basic elements of behavioural economics. We then assess the applications of behavioural economics to the analysis of tax compliance. Our central conclusion is that many, perhaps most, of the recent insights on what motivates tax compliance have flowed directly from behavioural economics. We conclude with suggestions on – and predictions of – directions in which future applications should prove useful.
    Keywords: Behavioural economics; tax compliance; expected utility theory; non-expected utility theory; social interactions theory
    JEL: C9 H26 H83
    Date: 2022–11
  4. By: Thiess Büttner; Boryana Madzharova; Orlando Zaddach
    Abstract: This paper analyzes the effects of an income tax credit for hard-to-tax consumer services on evasion of the value-added-tax (VAT). Based on the individual tax files of the universe of VAT payers in Germany, our analysis shows that harnessing incentives for consumers through tax credits fosters firms’ compliance with VAT by bringing in an element of third-party reporting at the last VAT stage. Our results point at strong stimulating effects of the introduction of the tax credit on reported sales as well as on the ratio of reported sales to inputs. We find limited price effects. While two thirds of the revenue losses in the income tax are recovered by an increase in VAT revenues, up to half of the revenue gain is associated with a response at the VAT evasion margin. The policy thus fosters considerable formalization effects.
    Keywords: tax compliance, value-added tax, income tax credit, third-party reporting
    JEL: H26 H25 H24
    Date: 2022
  5. By: Barile, Lory (Department of Economics, University of Warwick); Cullis, John (Department of Economics, University of Bath); Philip Jones (Department of Economics, University of Bath)
    Abstract: This paper begins by listing three uncomfortable implications of the standard expected utility model of individual decision-making concerning participation in fiscal crimes : that tax evasion and benefit fraud can be treated identically; fiscal crimes should be endemic; and that all individuals, depending on parameter values, should be either honest or dishonest. Levitt and List’s (2007) utility function relating to decisions with a moral dimension is adapted to offer insight into these implications involving an individuals optimal honesty and moral hinterland. Predictions are developed that include moral costs as a determinant of dishonest intentions and are tested with reference to some 2,942 questionnaire responses to a 2016 national (UK) survey. This paper offers insight into the way moral costs inform perceptions of the intrinsic value of doing the right thing thereby providing a richer analysis of fiscal crimes. The account has particular relevance for policy prescriptions that involve aspects of shame.
    Keywords: benefit fraud ; tax evasion ; optimal honesty ; moral costs JEL Codes: D01 ; H2 ; K42
    Date: 2022
  6. By: Bernardo Caldarola
    Abstract: This paper uses the case of Ghana to unpack the role of the informal sector in the process of structural change. A structuralist view of structural change - framed as changes in the employment shares of different industries - is combined with the insight that countries strive to diversify towards more complex industries in pursuit of economic upgrading. The paper adopts and adapts the product space and complexity analytical frameworks to compare changes in the relative importance of industries across the trade, formal and informal sectors, over a ten-year period starting in 2003. To assess whether the Ghanaian labour force has moved towards more or less complex industries, the changes in relative shares of finely disaggregated industries are assessed against an employment-based industrial complexity index. The results indicate that Ghana’s export and formal sectors have moved towards more complex industries, although export specialisation has moved towards export of natural resources. While exports of manufactured goods have increased, employment in formal and informal manufacturing has contracted, although, in the former case, employment has relocated towards more complex manufacturing industries. In contrast, the informal sector has moved towards less complex activities. The results stress on the need to align the productive capabilities of the informal sector with the Ghana's productive structure in order to allow the participation of Ghanaian households to the process of structural transformation.
    Keywords: Structural change; industrial complexity; Ghana; employment; informality.
    Date: 2022–11–28
  7. By: Puggioni Daniela; Calderón Mariana; Cebreros Alfonso; Fernández León; Inguanzo José A.; Jaume David
    Abstract: We characterize the salient features of the distribution of earnings and earnings changes of formal workers in Mexico using social security records for the period 2005-2019. We find strong evidence of deviations from normality of these distributions. Comparing the results obtained with administrative data and household survey data suggests that this latter source of information is inadequate to fully capture the evolution of inequality and the properties of earnings changes. We also study the impact of transitions out of and back into formal employment on wages earned in the formal sector and the effect of early exposure to informality on future earnings. We document that workers who exit formal employment experience a significant wage penalty upon re-entry and that having the first job in the informal sector has a negative and significant impact on future earnings.
    Keywords: Earnings dynamics;higher-order earnings risk;inequality;worker transitions;informal labor markets
    JEL: E24 J24 J31 J46
    Date: 2022–11
  8. By: Rafik Abdesselam (COACTIS - COACTIS - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne], ERIC - Entrepôts, Représentation et Ingénierie des Connaissances - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Jean Bonnet (UNICAEN UFR SEGGAT - Université de Caen Normandie - UFR de Sciences Économiques, Gestion, Géographie et Aménagement des Territoires - UNICAEN - Université de Caen Normandie - NU - Normandie Université); Ibrahima Dia (UG - Université de Guyane)
    Abstract: We investigated female entrepreneurship in Dakar with the following objectives: the study of individual characteristics of female entrepreneurs, their motivations, the existence of an entrepreneurial culture and their insertion in the networks. We were also interested in the entrepreneurial choice and when they take on the choice of the "administrative" sector (informal/formal). We have thus shown the importance of entrepreneurial culture and social capital in the Senegalese female entrepreneurship, as well as the motivations that distinguish entrepreneurial engagement in the informal sector compared to the formal sector. Necessity entrepreneurship is found more in the "small informal" sector, it participates, thanks to the support from relatives, to the participation of women's networks, in the smooth running of a developing economy since it is a source of employment that is adapted to the social and human capital of the majority of Senegalese women.
    Keywords: female entrepreneurship,informal sector,entrepreneurial culture,discriminatory analysis,Dakar
    Date: 2022
  9. By: Hsi-Chuan Wang (The University of Toronto)
    Abstract: Planning for informal settlements is a challenge in many countries. Informal settlements usually suffer from a lack of basic local services and infrastructure. This paper examines government expenditures in Accra, Ghana, to analyze the extent to which the Accra Metropolitan Assembly (AMA) invests in informal settlements. I engage with this topic from three perspectives. First, I review Accra’s urbanization and address how its historical legacies, such as Accra’s first town plan in 1958, have influenced current settlements. I find that little progress has been made because many “focal points” (that is, slums) identified in the 1958 plan remain as locations of present informal settlements. Second, from a fiscal standpoint, I analyze AMA’s budgetary trends from 2013 to 2017 to highlight this local government’s overreliance on the national government for infrastructure investments. Few infrastructure projects in AMA were supported by local government alone and many development projects would not be possible without external funds. Third, I engage with AMA’s unbalanced investments from a governance perspective, in part by exploring the distribution of drainage projects across the city. I notice that the funding for the drainage projects in AMA has not been deployed in the submetros with the most need. This finding also highlights that Ghanaian decentralization policy has not resulted in effective and just urban development, such as balancing citywide drainage development within local jurisdictions. Upon relating these dynamics with Ghana’s decentralization progress, I argue that: (1) Ghana’s arbitrary decision on decentralization does not help alleviate local pressure on informal settlement planning, and that (2) AMA as a local government has overlooked the urgency of balancing local development. I suggest local governments address these issues by enhancing their capacity for just governance and strengthening coalitions with other local governments.
    Keywords: Accra, Ghana, informal settlements, infrastructure, drainage
    Date: 2021–11

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.