nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒04‒17
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. A Search Model with Self-Employment and Heterogeneity in Managerial Ability By Eliane Badaoui; Olivier Bargain; Prudence Magejo; Eric Strobl; Frank Walsh
  2. Informality, Consumption Taxes and Redistribution By Pierre Bachas; Lucie Gadenne; Anders Jensen
  3. Informal Sector, Innovation and Growth By Chandril Bhattacharyya; Dibyendu Maiti
  4. Oil price shocks, protest, and the shadow economy: Is there a mitigation effect? By Phoebe W Ishak; Mohammad Reza Farzanegan
  5. The impact of Robots in Latin America: Evidence from Local Labor Markets By Irene Brambilla; Andrés César; Guillermo Falcone; Leonardo Gasparini
  6. Final assessment report. Assessment of development account project 1819 BB: Technological transformations in Latin America: promoting productive jobs and confronting the challenge of new forms of informal employment By -
  7. Digital Merchant Payments as a Medium of Tax Compliance By Bernad, Ludovic; Nsengiyumva, Yves; Byinshi, Benjamin; Hakizimana, Naphtal; Santoro, Fabrizio
  8. Does going cashless make you tax-rich? Evidence from India's demonetization experiment By Satadru Das; Lucie Gadenne; Tushar Nandi; Ross Warwick
  9. How to improve tax compliance? Evidence from population-wide experiments in Belgium By De Neve, Jan-Emmanuel; Imbert, Clement; Spinnewijn, Johannes; Tsankova, Teodora; Luts, Maarten

  1. By: Eliane Badaoui; Olivier Bargain; Prudence Magejo; Eric Strobl; Frank Walsh
    Abstract: The view of informal employment as a last resort in the labour market has recently been challenged by numerous studies documenting the existence of a high degree of heterogeneity within the formal and informal sectors - in particular the presence of high-tier informal work corresponding to voluntary self-employment. There is currently not much theoretical support for these observations. We develop a formal model to explain this growing empirical evidence about substantial heterogeneity within formal/informal labour markets. In our model, workers may enter self-employment or search for jobs as employees, while allowing for heterogeneity across workers’ managerial ability. While workers with higher managerial ability will manage larger firms, workers with lower managerial ability will manage smaller firms and be in self-employment only when they cannot find a salaried formal/informal job. For the latter, self-employment in the informal sector is the outside employment option.
    Keywords: Self-employment; Managerial ability; Informal sector.
    JEL: J31 O17
    Date: 2023
  2. By: Pierre Bachas (World Bank Research); Lucie Gadenne (Queen Mary University); Anders Jensen (Harvard Kennedy School and NBER)
    Abstract: Can taxes on consumption redistribute in developing countries? Contrary to consensus, we show that taxing consumption is progressive once we account for informal consumption. Using household expenditure surveys in 32 countries we proxy for informal consumption using the type of store where purchases occur. We establish that the budget share spent in informal stores steeply declines with income, so that richer households pay a substantially larger share of their income in taxes. Our findings imply that the widespread policy of exempting food from taxation is hard to justify on equity grounds in low-income countries.
    Keywords: Budget Surveys, Inequality, Informality, Redistribution, Taxes.
    JEL: E26 H21 H23
    Date: 2022–12–09
  3. By: Chandril Bhattacharyya (Centre for Development Studies Kerala); Dibyendu Maiti (Department of Economics, Delhi School of Economics)
    Abstract: This paper applies the endogenous growth model with R&D in the presence of the informal sector. It establishes the existence of formal and informal sectors at the steady state, where the formal sector only can buy patented intermediate varieties. The patent for a finite period reduces the incentive to invest in R&D, thereby reducing growth. It further shows that the steady-state growth rate depends on the share of formal employment and vice versa. However, the extent to which the economy would grow depends on various country-specific factors, production-related characteristics and the cost of accessing production activities in the informal sector. As a country develops, we found that a drop in substitutability between formal and informal goods and a rise in formal wage rent with the development reduce the share of formal employment and growth rate. In contrast, improved formal productivity increases them. They together may produce a non-monotonic shape of growth and formal employment share with the level of development. JEL Codes: E26, O11 Key words: Informal Sector, R&D, Patent length, growth
    Date: 2023–03
  4. By: Phoebe W Ishak (Freie Universität Berlin); Mohammad Reza Farzanegan (Philipps Universität Marburg = Philipps University of Marburg)
    Abstract: In this study, we look at how oil price shocks affect the incidence of protests in a country and how the size of a country's shadow economy influences this relationship. Using panel data from 144 countries, from the period of 1991-2015, we find evidence that negative oil price shocks significantly increase protests in countries with small shadow economies. The effect dissipates as the size of the shadow economy increases and eventually vanishes in countries with a shadow economy representing more than 35% of gross domestic product. Our analysis departs from existing literature by emphasizing the moderating role of a shadow economy on the effects of negative oil shocks on the incidence of protests in oil-dependent economies. The results are robust to various specifications and their broader implications are discussed.
    Keywords: conflict, oil price shocks, protest, resource curse, shadow economy
    Date: 2021–09
  5. By: Irene Brambilla (CEDLAS-IIE-FCE-UNLP); Andrés César (CEDLAS-IIE-FCE-UNLP); Guillermo Falcone (CEDLAS-IIE-FCE-UNLP & CONICET); Leonardo Gasparini (CEDLAS-IIE-FCE-UNLP & CONICET)
    Abstract: We study the effect of robots on labor markets in Argentina, Brazil, and Mexico, the major robot users in Latin America, during the period 2004{2016. We exploit spatial and time variations in exposure to robots arising from initial differences in industry specialization across geographic locations and the evolution of robot adoption across industries, to estimate a causal effect of robots on local labor market outcomes. We find that district's exposure to robots causes a relative deterioration in labor market indicators such us unemployment and labor informality. We document that robots mainly replace formal salaried jobs, affecting young and semi-skilled workers to a greater extent, and that informal employment acts as a buffer that prevents a larger increase in unemployment.
    JEL: J23 J24 J31 J46 O14 O17 R10
    Date: 2023–04
  6. By: -
    Date: 2022–09
  7. By: Bernad, Ludovic; Nsengiyumva, Yves; Byinshi, Benjamin; Hakizimana, Naphtal; Santoro, Fabrizio
    Abstract: Consumers in Africa increasingly pay for their purchases through mobile money, especially since the pandemic. These transactions are known as digital merchant payments. Rwandan consumers can choose between using standard mobile money services or a specific service only for digital merchant payments – MoMo Pay. Digital payments of any kind have the potential to improve tax compliance, because they imply digital data trails and better record keeping. How far is this potential being realised in Rwanda? In collaboration with the Rwanda Revenue Authority, we collected survey data from 1, 100 merchants country-wide and were able to correlate this with tax administrative data, i.e. the tax records of the interviewees held by the revenue authority. We also conducted focus group discussions with 15 merchants. We found that the great majority of payments are still made in cash. Larger, more knowledgeable and financially included merchants opt for MoMo Pay as opposed to standard mobile money, the latter being preferred by female and less educated and equipped merchants. At the start of the pandemic, in March 2020, for a period of 18 months, all fees on MoMo Pay transactions were waived to foster digital payments through the service. In September 2021, fees were then reintroduced. The waiver led to a significant rise in the use of MoMo Pay relative to cash. When the MoMo Pay fee was reintroduced, there was a significant shift back to cash from both MoMo Pay and standard mobile money services, even if the latter were not affected by the fee. Lastly, we measure whether the adoption of digital payments correlates with merchants’ tax perceptions and compliance behaviour. First, we show that merchants using MoMo Pay tend to disagree with the obligation of paying taxes in order to receive public services, a measure of fiscal reciprocity. Such negative correlation is probably due to the fee imposed on MoMo Pay. Furthermore, standard mobile money usage improves the perceived ease of complying with taxes, while that is not the case for MoMo Pay. Again, the fact that fees on MoMo Pay are not clearly identifiable in MoMo Pay statements complicates merchants’ reporting and reconciliation of their activity for tax purposes. When it comes to compliance behaviour with VAT, the adoption of digital payments by merchants only improves their reported VAT sales and inputs, and only in the short term, while final VAT liability does not change. This hints at perverse compensating strategies to avoid taxes. We recommend that the tax administration better understand the adoption patterns of digital payments and incentivise usage among less equipped categories of taxpayers. The tax administration would also benefit from getting access to mobile money data to better monitor and enforce merchants’ compliance.
    Keywords: Finance,
    Date: 2023
  8. By: Satadru Das (Reserve Bank of India); Lucie Gadenne (Queen Mary University of London); Tushar Nandi (Indian Institute of Science Education and Research (IISER)); Ross Warwick (Institute for Fiscal Studies)
    Abstract: This paper investigates the effect of electronic payment technology on tax compliance in a large developing economy. We consider India's demonetization policy which, by limiting cash availability, led to a large increase in the use of electronic forms of payments. Using administrative data on firms' tax returns and variation in the strength of the demonetization shock across local areas, we find that greater use of electronic payments leads to firms reporting more sales to the tax authorities. Our estimates imply that the shift to electronic payments increased reported sales by 5% despite demonetization's negative effect on economic activity.
    Keywords: tax compliance, electronic payments, demonetization
    JEL: H26 O23 H25
    Date: 2022–10–21
  9. By: De Neve, Jan-Emmanuel; Imbert, Clement; Spinnewijn, Johannes; Tsankova, Teodora; Luts, Maarten
    Abstract: We study the impact of simplification, deterrence and tax morale on tax compliance. We ran four natural field experiments varying the communication of the tax administration with the universe of income taxpayers in Belgium throughout the tax process. A consistent picture emerges across experiments: (i) simplifying communi- cation substantially increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective, and often backfires. A discon- tinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. We find that simpli- fication is far more cost-effective, allowing for substantial savings on enforcement costs.
    Keywords: tax compliance; field experiments; simplification; enforcement
    JEL: C93 D91 H20
    Date: 2021–05–01

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