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on Informal and Underground Economics |
| By: | Mascarúa Lara Miguel A. |
| Abstract: | How does imperfect law enforcement affect drug trafficking, predation on firms, informality, and aggregate production? To quantify it, a general equilibrium occupational model is developed in which there is room for drug trafficking, crime against businesses, and tax evasion in the presence of imperfect institutions. Detailed micro-level data on business victimization and cartels in Mexico are used to calibrate the model. It is found that the imperfect application of the law generates considerable losses in production derived from a misallocation of occupations and resources. Finally, using counterfactual simulations, the effects of policies that seek to improve the allocation of resources are calculated. With complete law enforcement in the illegal drug market, the workers in that sector would relocate to the productive sector, and aggregate production would increase. Without crimes against businesses, which would allow a reallocation of work, capital, and occupations to the formal sector, production would increase even more. However, the largest effects come from a decrease in informality. |
| Keywords: | Misallocation;aggregate distortions;drug cartels;crime;formal and informal sectors |
| JEL: | O11 O17 O43 O47 K42 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2022-16&r=iue |
| By: | Chakraborty, Pavel (Lancaster University); Singh, Rahul (Ahmedabad University); Soundararajan, Vidhya (Indian Institute of Technology, Bombay) |
| Abstract: | Does higher import competition increase formalization and aggregate productivity? Exploiting plausibly exogenous variation from Chinese imports, we provide empirical causal evidence that higher imports increases the share of formal manufacturing enterprise employment in India. This formal share increase is both due to the rise in formal-enterprise employment driven by the high productivity firms, and a fall in informal-enterprise employment. The labor reallocation is enabled by the formal firms' hiring of contract workers, who do not carry stringent string costs. Overall, Chinese import competition increased formal sector employment share by 3.7 percentage points, and aggregate labor productivity by 2.87%, between 2000-2001 and 2005-2006. |
| Keywords: | import competition, formal sector employment, informality, contract workers, Chinese imports, reallocation, misallocation |
| JEL: | F14 F16 O17 O47 F66 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15760&r=iue |
| By: | Camila Cisneros-Acevedo; Alessandro Ruggieri |
| Abstract: | In this paper we study how firm-level policies affect labor market outcomes in the developing world. For a large set of low- and medium-income countries, we document that high corporate income tax rate is associated to a higher rate of informal employment, lower GDP per worker and lower unemployment rate. To interpret this evidence, we build a general equilibrium model that features: 1) industry dynamics dictated by heterogeneous firms, 2) search and matching friction, 3) imperfectly enforced legislation, leading to informal employment along the intensive and the extensive margin. We estimate the model using firm and worker-level data from Peru — a country where more than 70 per cent of the population is employed in informal jobs, and use the model as a laboratory to assess the distributional consequences of firm-level taxes and policies. The model generates the observed cross-country relation between corporate income tax rate and labor market outcomes: a reduction in corporate taxes concentrates employment over a smaller mass of larger and more productive firms, increasing efficiency and reallocating workers to formal employment at the expense of a higher unemployment rate. Quantitatively, changes in tax rates account for about 60% of the difference in unemployment rate and 45% of the differences in GDP per worker observed across countries. The model provides a basis for the evaluation of various firm-level policy interventions. |
| Keywords: | corporate tax, firm dynamics, informality, unemployment, welfare |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:not:notgep:2022-11&r=iue |
| By: | Gardner, Jessica,; Walsh, Kieran; Frosch, Michael |
| Abstract: | Abstract. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:995209293202676&r=iue |
| By: | di Porto, Edoardo (University of Naples Federico II); Garibaldi, Pietro (Collegio Carlo Alberto); Mastrobuoni, Giovanni (Collegio Carlo Alberto); Naticchioni, Paolo (Roma Tre University) |
| Abstract: | Flexible work arrangements are on the rise in many countries, ranging from Germany's mini-jobs to UK's zero-hours contracts. These contracts allow for quick labor demand adjustments and are also seen as a way to discourage undeclared work, and more than 10 years ago Italy introduced what was arguably one of the most exible alternative work arrangements: "labor vouchers". The labor vouchers could be easily purchased to pay for occasional work, with no additional paper work. Between 2008 and 2016 the number of 10-euro labor vouchers purchased in a year went up from 500,000 (less than 1 per 100 inhabitants) to almost 300 million (about 5 times the Italian population). Using random timing in labor inspections, as well as the abolition of labor vouchers, we document a perverse effect of badly designed alternative work arrangements: they severely disrupt the work of labor inspectors, allowing firms to increase the amount of undeclared work. Firms who use vouchers for this purpose are shown to hire more regular part-time and fixed-term workers when vouchers become unavailable. |
| Keywords: | informality, labor vouchers, flexible work arrangements, occasional work, zero-hour contracts |
| JEL: | J23 H26 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15794&r=iue |
| By: | Sam Njinyah (Manchester Metropolitan University, UK); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | The purpose of this paper is to examine the relationship between a firm starting operation informally and its future innovation and whether this relation is moderated by institutional support (having access to finance from financial institutions to run their business). Data from the World Bank Enterprise Survey on 30 Eastern European and South-East Asian countries were analysed using probit regression analysis. The findings show that there is a positive significant relationship between firms that start operations informally and the firms’ innovation and that such effect persists over time. We found that this relationship is stronger if the firms can gain access to finance to expand their business activities. Finally, our result shows that such a relationship is based on the type of innovation being pursued by the firm. By examining the moderation effect of access to finance on starting a business informally, we provide an alternative explanation to policymakers on how to deal with informal firms to benefit from their contribution to growth. |
| Keywords: | Informality/unregistered firms, Innovation, Institutions, and Eastern European and South East Asia |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:22/099&r=iue |
| By: | POSTI, LOKESH; KHOLIYA, MAMTA; POSTI, AKHILESH KUMAR |
| Abstract: | The study investigates the differential impact of various sources of finance on informal firm performance. In the informal sector, where access to finance is limited, we investigate how productivity varies with different sources of finance. Given the data limitations, a pseudo-panel data design was used by combining the three only available, independent cross-sectional surveys conducted by the National Sample Survey Office between 1999-2000 and 2015-16. Using formal and informal credit as two different sources of finance and total factor productivity (TFP) as the primary measure of firm performance, we find a positive relationship among them across all major industries; however, the impact of formal finance was higher than informal credit. Our results stand robust against alternative performance measures. Additionally, to address endogeneity concerns, dynamic panel data analysis was adopted. Obtained findings convey essential policy implications for intensification of financial inclusion and financial literacy. |
| Keywords: | Informal Sector, Finance, Credit, Total Factor Productivity, Pseudo Panel, India |
| JEL: | D2 L21 L25 M2 O14 |
| Date: | 2022–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115550&r=iue |
| By: | Surbhi Kesar (Department of Economics, SOAS University of London) |
| Abstract: | Subcontracting linkages are seen in the literature as key channels to facilitate a transformation of the traditional informal enterprises into the larger modern ones and such linkages are expected to grow stronger with economic growth. Using nationally representative survey data for Indian informal manufacturing sector (IMS), focusing on the peak growth decade (2001-11), we examine the nature and pattern of subcontracting linkages in the IMS and interrogate whether these linkages have played the expected role of facilitating a transformation of the IMS. We estimate a fund – net accumulation fund – to capture the accumulation possibilities of informal enterprises and examine the impact of the linkages on the possibility of traditional IMS enterprises to accumulate and transition over time. Using this as our motivation, we characterize the nature of subcontracting linkages, examine their pattern of evolution, and investigate whether the nature is of the dynamic kind that is likely to facilitate a transformation. The subcontracting relations in the Indian IMS predominantly appear to be akin to traditional putting out system with very low possibilities to accumulate. Such putout enterprises can be categorized as a hybrid of a worker and an enterprise, which neither have an autonomy over the production processes nor are fully incorporated within the parent firm as a wage worker. The prevailing nature of the subcontracting linkages appear to be driven by distress and raises doubt on the ability of such linkages to enable the accumulation possibilities of traditional enterprises and facilitate an economic transformation of the IMS. |
| Keywords: | informality, subcontracting, dualism, transformation, manufacturing |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:254&r=iue |
| By: | Robles Mengoa, Eugenia; Geenen, Sara; Verbrugge, Boris; Besmanos, Beverly; López Valverde, Rafael |
| Abstract: | This paper is part of the project ‘InForMining: an in-depth study of informalization in global gold production’ funded by the Flemish Research Foundation (FWO) and supervised by Prof. Dr. Sara Geenen and Dr. Boris Verbrugge at the Institute of Development Policy (IOB), University of Antwerp, Belgium.2 The project has two main objectives: (1) to study informalization processes in the global gold production system and (2) to study their effects on workers. Responding to the first objective, we studied informalization as one of the structural trends characterizing global gold production. This resulted in the book Global Gold Production Touching Ground (Verbrugge & Geenen, 2020). In response to the second objective, we studied the question of informal labour in mining areas in three countries across three continents: Peru in Latin America, the Philippines in Asia and the Democratic Republic of Congo (DRC) in Africa. In this paper, we present the results of a survey carried out by PhD student Eugenia Robles Mengoa and the team of Bantay Kita in the Philippines. Bantay Kita is a coalition of social organizations dedicated to the transparency and accountability of extractive industries. The data were analysed by Eugenia Robles and consultant Rafael López. |
| Keywords: | mining, gold, Philippines |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:iob:wpaper:2022.05&r=iue |
| By: | Emmanuel Flachaire (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Nora Lustig (Tulane University); Andrea Vigorito (Instituo de Economia Universidad de la Republica) |
| Abstract: | Household surveys do not capture incomes at the top of the distribution well. This yields biased inequality measures. We compare the performance of the reweighting and replacing methods to address top incomes underreporting in surveys using information from tax records. The biggest challenge is that the true threshold above which underreporting occurs is unknown. Relying on simulation, we construct a hypothetical true distribution and a "distorted" distribution that mimics an underreporting pattern found in a novel linked data for Uruguay. Our simulations show that if one chooses a threshold that is not close to the true one, corrected inequality measures may be significantly biased. Interestingly, the bias using the replacing method is less sensitive to the choice of threshold. We approach the threshold selection challenge in practice using the Uruguayan linked data. Our findings are analogous to the simulation exercise. These results, however, should not be considered a general assessment of the two methods. |
| Keywords: | correction methods,household surveys,income underreporting,inequality,linked data,replacing,reweighting,tax records |
| Date: | 2022–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03879312&r=iue |
| By: | Garcia Alvarado Fernando; Mandel Antoine (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper builds on recent insights from network theory and on the rich dataset made available by the Panama Papers in order to investigate the micro-economic dynamics of tax-evasion. We model offshore financial entities documented in the Panama Papers as links between jurisdictions in the global network of tax evasion. A quantitative analysis shows that the resulting network, far from being a random collection of bilateral links, has key features of complex networks such as a core-periphery structure and a fat-tail degree distribution. We argue that these structural features imply that policy must adopt a systemic perspective to mitigate tax evasion. We offer three sets of insights from this perspective. First, we identify through centrality measures tax havens that ought to be priority policy targets. Second, we show that efficient tax treaties must contain exchange information clauses and link tax-havens to non-haven jurisdictions. Third, we show that the optimal deterrence strategies for a social-planner facing a strategic tax-evader in a Stackelberg competition can be characterized using the notion of Bonacich centrality. |
| Keywords: | H26 H87 D85 C54 Tax Evasion Socio-economic Networks Game Theory,H26,H87,D85,C54 Tax Evasion,Socio-economic Networks,Game Theory |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-03881348&r=iue |
| By: | Luca Bagnato |
| Abstract: | In this paper I study whether citizens’ tax morale (and, more broadly, citizens’ attitudes towards the state) can be affected by past institutions, focusing on the role of historical fiscal capacity. Exploiting the features of the tax collection system of a pre-unification state in XIX Century Italy I identify differences in local historical fiscal capacity (as proxied by geographical proximity to a tax collector) and map them into contemporary tax morale, as measured by evasion of the TV Tax in 2014. Exploiting only variation in historical fiscal capacity that arises within matched pairs of neighbouring towns on the border of tax districts, I find imprecisely estimated and arguably small differences in tax morale today between towns where fiscal capacity was different. Investigating the mechanisms of transmission, I provide evidence that phenomena associated with structural transformation are likely to have halted the persistence of the historical fiscal capacity effect. |
| Keywords: | Fiscal capacity, tax collection, tax evasion, tax morale, TV tax, Italy |
| JEL: | D73 D91 N43 H26 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:424&r=iue |
| By: | Santoro, Fabrizio; Waiswa, Ronald |
| Abstract: | Taxing the richest individuals is a priority goal for every tax administration, and even more so in Africa, where tax revenues are insufficient to fund development. Due to tax evasion and limited fiscal capacities, personal income tax is largely underperforming across the continent (Moore 2020). Evidence of widespread evasion by the richest in the developed world – through sophisticate and aggressive avoidance schemes – has been well established in the academic literature. Whereas very little is known about policies that might be effective for taxing the wealthy in Africa, likely because so few countries have set up dedicated units for taxing the richest. In collaboration with the Uganda Revenue Authority, this study is the first of its kind studying the impact of the launch of a specific unit in the Uganda Revenue Authority (URA) for the richest taxpayers. This Research in Brief is a summary of ICTD Working Paper 143 by Fabrizio Santoro and Ronald Waiswa. |
| Keywords: | Governance, |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:17787&r=iue |
| By: | Ram Singh (Department of Economics, Delhi School of Economics) |
| Abstract: | The income reporting behaviour of different wealth groups is a critical public finance issue that has remained under-researched in the Indian and international contexts. We model and estimate the relationship between wealth and reported income for individuals and families across different wealth groups. We use a new dataset based on affidavits filed by election contestants along with the Forbes List of billionaires, and statistics published by the Indian Tax Department. We show that wealthier is the individual or the family, the lesser is the reported income relative to wealth. On average, a 1% increase in the family wealth is associated with a decrease of more than 0.5% in the reported income as a ratio of wealth. The total income reported by the bottom 10% of families in the data amounts to more than 188% of their wealth; in contrast, the wealthiest 5% [respectively 0.1%] of families reported incomes that were just 4% [respectively 2%] of their wealth. The total income reported by the wealthiest Forbes list families is less than 0.6% of their wealth. From another perspective, the total income reported by the wealthiest 0.1% of families is only about a fifth of the returns from their capital, and at least 80% of their capital income goes unreported in the income tax returns. For the Forbes-listed 100 families, more than 90% of the capital returns do not figure in their reported incomes! The income-wealth ratios for affluent individuals exhibit very similar patterns. We discuss the processes responsible for the “missing” income of the wealthy groups, and show that this “missing” income leads to an underestimation of income inequality. Furthermore, it reduces the tax liability of the wealthiest percentile group to a mere 1% of their wealth. The tax liability of the wealthiest 0.1 centile and the Forbes-listed families is less than one-tenth of their capital income. Tax paid by these groups relative to their wealth is smaller than the relative tax liability for middle-wealth groups. Finally, we show that ceteris paribus, women report lower incomes than men, and that individuals exposed to greater media and civil society scrutiny report relatively high incomes. Our analysis suggests that recent measures taken by the Indian central government against illicit income and wealth hoarding have delivered the intended results. Key Words: Income, Wealth, Income-Wealth Ratio, Inequality, Income Tax, Tax Evasion. JEL Codes: D31, D63, H24, H26 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:331&r=iue |
| By: | Rodríguez Núñez, Juan Bautista |
| Abstract: | This paper analyzes the reverse causality between poverty and labor informality in the Dominican Republic, generating a profile that encompasses the socioeconomic and demographic factors of individuals to both poverty and labor informality. To that end, the National Labor Force Survey (Encuesta Nacional de Fuerza de Trabajo, ENFT), in the years 2010 and 2016, is used. Also, probabilistic regression models "Probit", with instrumental variables for the identification of causal effects. The results are consistent with previous literature, indicating that both poverty and informality have an explanatory effect on each other. In this sense, both phenomena are concentrated in the least educated groups, especially in rural areas. |
| Keywords: | economic development; labor economics; econometrics; job; poverty; "Probit" with instrumental variables; poverty; labor informality; National Labor Force Survey (ENFT). |
| JEL: | C01 C25 C26 I32 J01 J23 J43 J46 O11 O17 |
| Date: | 2022–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115642&r=iue |
| By: | Robles Mengoa, Eugenia; Geenen, Sara; Verbrugge, Boris; López Valverde, Rafael |
| Abstract: | Este documento forma parte del proyecto "InForMining: un estudio profundo de la informalidad en la producción global de oro", financiado por la Fundación Flamenca de Investigación (FWO) y supervisado por la Prof. Dra. Sara Geenen y el Dr. Boris Verbrugge del Instituto de Políticas del Desarrollo (IOB) de la Universidad de Amberes, Bélgica. Este proyecto tiene dos objetivos principales: estudiar los procesos de informalización en el sistema global de producción de oro, así como sus efectos sobre los trabajadores. Respondiendo al primer objetivo, hemos estudiado la informalización como una de las tendencias estructurales que caracterizan la producción mundial de oro. Esto ha dado lugar al libro "Global gold production touching ground" (Verbrugge y Geenen, 2020a). En respuesta al segundo objetivo, hemos estudiado la cuestión del trabajo informal en las zonas mineras de tres países de tres continentes: Perú en América Latina, Filipinas en Asia y la República Democrática del Congo (RDC) en África. En este trabajo presentamos los resultados de una encuesta realizada por la estudiante de doctorado Eugenia Robles Mengoa. Los datos fueron analizados por Eugenia Robles y el consultor Rafael López. |
| Keywords: | mining, gold, Peru |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:iob:wpaper:2022.04&r=iue |