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on Informal and Underground Economics |
| By: | Burak Uras (Williams College); Tulio Bouzas (Tilburg University); ; |
| Abstract: | "Why do firms continue to rely on cash in economies where digital payments are widespread and electronic transaction costs are low? This paper shows that the an- swer lies in the interaction between payment technologies and tax enforcement. Us- ing randomized experimental evidence from Kenyan small and medium-sized firms, we establish that the adoption of electronic payments causally increases tax com- pliance by raising transaction traceability. Moreover, SME survey evidence shows that tax evasion is associated with cash discounts. Motivated by these findings, we develop a microfounded general equilibrium model in which heterogeneous firms choose prices, payment acceptance, and tax evasion jointly. Cash facilitates eva- sion but exposes buyers to transaction risk, while electronic payments are safer yet traceable by third parties. These trade-offs generate endogenous cash discounts, selective rejection of digital payments, and coexistence of payment instruments in equilibrium. The calibrated model shows that when electronic payments are non–interest-bearing, inflation increases cash usage and tax evasion, overturning the standard prediction that inflation reduces cash use. We characterize the op- timal policy mix and show that financial development, enforcement intensity, and inflation are tightly intertwined in maximizing government revenues and welfare." |
| Keywords: | E-Money, Pricing Heterogeneity, Tax Compliance, Macro Policy |
| JEL: | E44 G23 H26 |
| Date: | 2026–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:wil:wileco:2026_102 |
| By: | Canavire Bacarreza, Gustavo (World Bank); Herrero-Olarte, Susana (Universidad de Barcelona); Kim, Yeon Soo (World Bank) |
| Abstract: | This paper critically reviews the empirical and structural literature on the effects of income taxation on informal economic activity. Although labor taxation has been widely studied for labor market outcomes, evidence linking income taxes to informality remains fragmented and uneven across countries. Synthesizing findings from both developed and developing economies, the review finds that income taxes have limited effects on formal employment but significant impacts on labor informality, particularly in contexts with weak enforcement, fragile institutions, and highly vulnerable labor markets. Estimated elasticities of informality with respect to income taxation generally range between 3 and 5 percent, averaging around 3.5 percent. The literature, however, is skewed toward high-income countries and relies mainly on reduced-form empirical approaches, limiting understanding of behavioral responses, long-term dynamics, and institutional heterogeneity. Standard theoretical models, grounded in labor supply frameworks, often fail to treat informality as an endogenous margin under weak compliance and regulatory capacity. Consequently, studies may overstate revenue gains and understate distributional impacts. |
| Keywords: | income taxation, labor informality, developing economies, behavioral responses, labor markets, fiscal policy, critical review |
| JEL: | H22 H24 H26 J08 J21 J46 O17 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18449 |
| By: | Cabrera-Hernandez, Francisco (Department of Economics, Centro de Investigacion y Docencia Economicas); Duval Hernández, Robert (Open University of Cyprus) |
| Abstract: | This paper analyzes the labor market effects of Mexico’s 2019 minimum wage reform, which doubled wages in northern border municipalities. Using other northern municipalities with smaller wage adjustments as a comparison group, we examine changes in worker transitions across employment states. The reform lowered quit rates among formally employed workers but increased them for certain informal workers. Although the wage hike did not raise overall layoffs, it altered their composition: laid-off formal workers became more likely to transition into informal employment, while new formal hires increasingly came from previously employed informal workers. |
| Keywords: | minimum wage, employment transitions, Mexico |
| JEL: | J3 J38 J63 O10 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18443 |
| By: | Abhishek Anand (Madras Institute of Development Studies); Josh Felman (JH Consulting); Arvind Subramanian (Peterson Institute for International Economics) |
| Abstract: | New evidence suggests that India misestimated its annual economic growth rate during the past two decades. It appears that the Indian economy did not grow at a stable rate over the past two decades, as was earlier estimated, but rather boomed during the early 2000s, then decelerated after the global financial crisis and subsequent domestic shocks. Methodological revisions made in February 2026, following commendable consultations, aimed to address the challenges identified. Key Takeaways India's annual economic growth during the boom years between 2005 and 2011 may have been underestimated by about 1-1 1/2 percentage points on average, and subsequent growth between 2012 and 2023 may have been overestimated by about 1 1/2-2 percentage points. The first methodological issue leading to the misestimation is that the economy's formal sector has been used as a proxy for the vast informal sector, even though the latter was disproportionately hit after 2015 by demonetization, the introduction of the goods and services tax, and the COVID-19 pandemic. The second methodological issue causing misestimation is that the deflators for many sectors have been based on commodity prices, which have moved sharply relative to others. |
| Keywords: | GDP mismeasurement, national accounts, informal sector, price deflators, India |
| JEL: | E01 O47 C82 O11 O53 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp26-3 |
| By: | de Assis, Rebeca Froés; Loureiro, Carlos Felipe Grangeiro; Freitas, Clarissa; Humberto, Mateus |
| Abstract: | Transport-induced gentrification has been increasingly studied. Residential displacement is the primary concern underlying this. More recently, scholars have begun to explore this debate in informal settlements, as they have long been a housing solution for working-class people in the Global South. This paper further advances this debate by addressing a twofold objective. First, we wonder if gentrification can unfold in Latin American slums through the entry of slightly more affluent households. Second, we investigate whether the relocation of long-term residents can be considered market-driven displacements. To this end, we undertook a two-step approach that combined the comparison of Google Street View (GSV) images from different dates with a participatory workshop in a community impacted by a Light Rail Transit system (Fortaleza, Brazil). Our findings reinforce scholarly arguments that gentrification and displacement are two different and independent phenomena. This is because, despite finding no evidence of market-driven displacement, we find a few cases of low-income gentrifiers. For the Latin American theorization, this challenges the framing of gentrification as a conflict between antagonistic classes over space. Another contribution of our study concerns the spatial extent of transport-induced gentrification, as changes within the community were closely linked to regional restructuring processes. |
| Date: | 2026–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:ebq89_v1 |