the effect of taxes on labor supply in the underground economy this paper uses micro data from a randomized survey carried out in the metropolitan area of quebec city canada to analyze the decision to evade taxes and work in the underground economy the results indicate that taxes distort labor market activities away from the regular sector to the underground sector but the distortion is small for the average worker the distortion is large however for particular groups of the population such as welfare claimants copyright 1994 by american economic association

dodging the grabbing hand the determinants of unofficial activity in 69 countries across 69 countries higher tax rates are associated with less unofficial activity as a percent of gdp but corruption is associated with more unofficial activity entrepreneurs go underground not to avoid official taxes but to reduce the burden of bureaucracy and corruption dodging the grabbing hand in this way reduces tax revenues as a percent of both official and total gdp as a result corrupt governments become small governments and only relatively uncorrupt governments can sustain high tax rates 2000 elsevier science s a all rights reserved

regulatory discretion and the unofficial economy johnson kaufmann and shleifer 1997 find that the share of the unofficial economy in gdp is determined by the extent of control rights held by politicians and bureaucrats in post communist economies exploring in more detail the role of bribes and using a broader data set from the oecd latin america and transition economies we find that the unofficial economy accounts for a larger share of gdp when there is more corruption and when the rule of law is weaker while these findings are consistent with the earlier results for transition economies in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy the problem appears to be not regulation or taxation per se but whether the state administrative system can operate without corruption a high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy

inequality and informality abstract this paper presents theory and evidence on the determinants of the size of the informal sector we propose a simple theoretical model in which it is positively related to income inequality more so under weak institutions and is negatively related to the economy s wealth these predictions are then empirically validated using different proxies of the size of the informal sector income inequality and institutional quality the results are shown to be robust with respect to a variety of econometric specifications we also find that government interventions through regulations lose much of its robustness in the presence of the above factors

on the economic rationale of estimating the hidden economy the estimation of the hidden economy may be considered as a human passion for knowing the unknown although a large literature on the hidden economy exists the subject is still controversial at a very basic level there are disagreements about 1 the definition of the hidden activities 2 the terms used to describe these activities 3 the estimation or measurement procedures and finally 4 on the use of these estimates in economic analysis in this paper we will only consider the issues related to estimation economic and econometric analysis of the hidden economy thus we implicitly accept the term hidden economy and explicitly state the definition before entering into the main discussions for a comprehensive study of past literature readers are referred to feige 1989 gaertner and wenig 1985 and tanzi 1982 and the large number of references in these books the use of the hidden economy estimates for economic and econometric analysis can be classified into three potentially distinct but interrelated categories a the derivation of economic theory and or its implication for the existing theories b the formulation of economic policies and c econometric modelling if we consider that the tax evaded income is the only constituent of the hidden economy then the issues are almost obvious for all three categories however as we will see later such a simple interpretation of the hidden economy estimates is generally not possible for example in this paper we define the hidden economy as the unrecorded national income the unrecorded national income is calculated as the difference between the potential national income for the given currency in circulation and the recorded national income this definition of the hidden economy suggests that in principle it is larger than the tax evaded income the empirical illustrations are taken from the studies conducted in the united kingdom and india where this is a workable definition however for many other countries such an approach is totally inadequate as a measure of unrecorded national income since the method of estimating the hidden economy is constrained by the structure of the economy in this paper we shall present a brief description of a general method of estimating the hidden economy and appraise the applicability and limitation of the method due to space constraint we shall discuss very briefly the importance of the hidden economy on economic theory and on the empirical

production planning with limited inventory capacity and allowed stockout abstract in production planning there is a situation where the production quantity is limited by inventory capacity rather than production capacity this situation often happens in petrochemical manufacturing food processing glass manufacturing etc only a few studies can be found in literature for this situation among which the stockout strategy is not well studied in this paper we consider the production planning problem with inventory capacity as a limiting factor we further consider the problem with the following features 1 the stockout is allowed 2 production and lost sale cost functions are time varying and non increasing and 3 inventory capacity is constant these features have their roots in practice in this paper first we present a stockout model and then we prove some properties at an optimal solution to our model based on these properties we further develop an algorithm with polynomial time complexity using the network flow approach the paper also provides a case study to further justify practicability of the stockout strategy with limited inventory and to show the effectiveness of our model and algorithm

wages business cycles and comparative advantage abstract the standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages the model augments the standard rbc model to include lucas span of control distinction between market and non market and managerial and non managerial work makes aggregate wages far less cyclical than individual wages cross sectional comparative advantage between market and non market sector in the workforce substantially increases the response of aggregate hours to shifts in relative productivity as a result the model provides a reconciliation between data and equilibrium macroeconomics

quantifying the black economy measurement without theory yet again i shall argue that measurement without theory is a fair description of the published empirical work aimed at guestimating the size of the hidden or black economy i shall also argue that a mere guestimate of the overall size of the black economy is of limited value for the policy maker it is also important to know who is doing what where how and why then we can see what should and or can be done about legislating for or against the black economy in assessing the various attempts to measure the size of the black economy one should also be aware of a political dimension to some of this work perhaps a large and growing black economy is an indication that the economy is overtaxed and over regulated and a neo liberal adjustment is needed to free it up if a large part of the black economy is social security fraud then maybe unemployment is not really as bad as it looks clearly such political conclusions depended on having good theoretical as well as sound quantitative foundations and both these components were generally missing

parametric analysis of setup cost in the economic lot sizing model without speculative motives in this paper we consider the important special case of the economic lot sizing problem in which there are no speculative motives to hold inventory we analyze the effects of varying all setup costs by the same amount this is equivalent to studying the set of optimal production periods when the number of such periods changes we show that this optimal set changes in a very structured way this fact is interesting in itself and can be used to develop faster algorithms for such problems as the computation of the stability region and the determination of all efficient solutions of a lot sizing problem furthermore we generalize two related convexity results which have appeared in the literature

stock volatility and margin trading abstract this study examines additions of otc issues to the list of marginable securities and tests the hypothesis that margin trading destabilizes prices and contributes to volatility no detrimental effects are found instead evidence suggests that margin eligibility increases the flow of information and enhances depth though volumes are 30 larger volatility and noise decrease with the inception of margin trading further margin eligibility is valuable increases in value of 2 occur upon the announcement of eligibility analysis of a small sample of margin eligibility revocations provides no evidence that tightening margin restrictions reduces volatility

margin regulation and stock market volatility using daily and monthly stock returns we find no convincing evidence that federal reserve margin requirements have served to dampen stock market volatility the contrary conclusion expressed in recent papers by hardouvelis 1988a b is traced to flaws in his test design we do detect the expected negative relation between margin requirements and the amount of margin credit outstanding we also confirm the recent finding by schwert 1988 that changes in margin requirements by the fed have tended to follow rather than lead changes in market volatility after 55 years stock market margin requirements are again a source of controversy the securities and exchange act of 1934 transferred to the federal reserve system the authority exercised previously by the new york stock exchange and other private sector exchanges to set the minimum margins i e down payments that securities brokers and dealers subsequently expanded to all lenders must require of customers purchasing common stocks on credit the transfer of authority reflected the view widely held at the time that the low initial margins set by the exchanges had fueled the stock market boom of the 1920 s and that the frenzied liquidation of shares in response to margin calls had accelerated the crash in october 1929 supposedly dragging the economy down with it congress hoped that timely raising of margin requirements by the monetary authorities might dampen speculative excesses before they raged out of control or in today s terms that margin controls might reduce market volatility what the federal reserve has done since then with its margin setting authority can be seen from figure 1 which shows the time paths both of margins and one measure of market volatility from october 1934 to december 1987 margin requirements were set initially at 45 percent raised to 55 percent during the boomlet of 1936 and then cut back to a low of 40 percent after the sharp stockmarket break in the autumn of 1937 the requirement stayed at that level for the remainder of the 30 s and most of the war years but was stepped up sharply as the war drew to a close reaching 100 percent i e all cash no borrowing for most of 1946 changes were frequent over the next two and a half decades

the single item lot sizing problem with immediate lost sales abstract we introduce a profit maximization version of the well known wagner whitin model for the deterministic uncapacitated single item lot sizing problem with lost sales demand cannot be backlogged but it does not have to be satisfied either costs and selling prices are assumed to be time variant differentiating our model from previous models with lost sales production quantities and levels of lost sales in different periods represent a twofold decision problem we first transform the total profit function into a special total cost function we then prove several properties of an optimal solution a forward recursive dynamic programming algorithm is developed to solve the problem optimally in o t 2 time where t denotes the number of periods in the problem horizon the proposed algorithm can solve problems of sizes up to 400 periods in less than a second on a 500 mhz pentium iii processor

a competitive model of the informal sector abstract in developing nations formal workers tend to be more experienced more educated and earn more than informal workers these facts are often interpreted as evidence that low skill workers face barriers to entry into the formal sector yet there is little empirical evidence that such barriers are important this paper describes a model where in equilibrium the characteristics of formal and informal workers differ systematically even though labor markets are perfectly competitive the informal sector emphasizes low skill work as in the data because informal managers have access to less outside financing and choose to substitute low skill labor for physical capital

a quantitative analysis of inflation as a tax on the underground economy abstract inflation rates are more dispersed and are persistently higher in developing countries this paper quantifies the importance of the public finance motive for inflation in the presence of a tax evading sector the underground economy the approach is motivated by the observation that the underground economy is especially large in poor countries the analysis builds on a general equilibrium monetary model with two production sectors where income in one of the sectors cannot be taxed a benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate the model is first calibrated to the u s economy and is then used for a cross country simulation the resulting relationships between the size of an underground economy inflation rate income tax rate and the share of seigniorage in the government revenue rationalize the cross country data quantitatively well

start up costs limited enforcement and the hidden economy abstract this paper examines how much of the difference in the size of the informal sector and in per capita income across countries can be accounted by regulation costs and enforcement of financial contracts it constructs and solves numerically a general equilibrium model with credit constrained heterogenous agents occupational choices over formal and informal businesses financial frictions and a government sector which imposes taxes and regulations on formal firms the benefit from formalization is better access to outside finance the quantitative exercises suggest that i regulation costs and not the level of enforcement account for differences in the size of the informal sector between united states and mediterranean europe ii for a developing country like peru however contract enforcement and regulation costs are equally important in accounting for the size of the informal sector and iii regulation costs and contract enforcement do not account for most of the income differences observed among countries

simulation based sequencing and lot size optimisation for a production and inventory system with multiple items abstract we investigate the following decision problem a manufacturing unit has to meet a random demand for n items at the same time only one item can be manufactured manufacturing times are random whereas set up times are known positive constants but different for different items finished production is stored in a warehouse with finite capacity the availability of raw material is always guaranteed demand that cannot be satisfied by items in the warehouse will be backordered in a queue with given capacity demand that meets a full backorder queue is lost we assume cost for manufacturing items for production switches for holding items in the warehouse for waiting and lost demand for sold items a given reward is earned the problem now is to define such a manufacturing policy i e a sequencing rule and a lot size rule which maximises the expected profit per time unit since that problem is too complex for an analytical solution we restrict our search for an optimal policy to simple structured policies which can be described by a few parameters to find optimal parameter values we use simulation optimisation where a simulator for the system is combined with a genetic algorithm as an optimiser the paper is finished with some numerical examples to show the applicability of the proposed approach

shadow economies size causes and consequences using various methods the size of the shadow economy in 76 developing transition and oecd countries is estimated average size varies from 12 percent of gdp for oecd countries to 23 percent for transition countries and 39 percent for developing countries increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy especially in oecd countries according to some findings corruption has a positive impact on the size of the shadow economy and a growing shadow economy has a negative effect on official gdp growth

the single product lot sizing problem with constant parameters and backlogging exact results a new solution and all parameter stability regions we consider the single product lot sizing problem over a finite planning horizon demand at each period is constant and excess demand is completely backlogged holding and backlogging costs are proportional to the amount of inventory stocked or backlogged while ordering cost is fixed independent of the quantity ordered the optimal policy targets to minimize the total relevant costs over the planning horizon the key results of this paper are 1 an explicit formula for the optimal total cost as a function of the model parameters and the number of cycles of the policy 2 a new polynomial time algorithm which determines the overall optimal policy and 3 stability regions for any solution considering simultaneous variations on all cost and demand parameters the proposed algorithm is easy to implement and therefore is suitable for practical use

modelling the informal sector formally abstract the theoretical characterization of formal informal sector dualism by labor market dualism is integrated with its empirical characterization by size dualism by supposing that the minimum formal sector wage is only enforced for firms greater than a certain size a firm s size varies directly with the talent of its enterpreneur manager and the choice between formal and informal sector entrepreneurship is determined endogenously it is then shown that the size gap between the smallest formal sector firm and largest informal sector firm varies directly with the formal informal sector wage differential which in turn is shown as expected to increase the further is the minimum wage above the market clearing wage the comparative statics of changes in the size of the firm above which the minimum wage is enforced are also examined

further evidence on the firm size relation and stock market responses to changes in federal reserve margin levels the virtually monotonic firm size price reactions observed following changes in u s federal reserve market margin requirements over the post 1962 period provide dramatic new evidence in support of the hypothesis that changes in margin levels are associated with changes in security return behavior variance tests of the 1970 and 1971 margin decreases also produce evidence consistent with this hypothesis

margin requirements volatility and the transitory component of stock prices official margin requirements in the u s stock market were established in october 1934 to limit the amount of credit available for the purpose of buying stocks since then higher or rising margin requirements are associated with lower stock price volatility lower excess volatility and smaller deviations of stock prices from their fundamental values the results hold throughout the post 1934 period and are not very sensitive to the exclusion of the turbulent depression years from the sample thus margin requirements seem to be an effective policy tool in curbing destabilizing speculation jel 313 520 federal regulation of securities margins was mandated by congress in the securities exchange act of 1934 the stock market experience of the late 1920s led congress to the conclusion that credit financed speculation in the stock market might create excessive market volatility through a pyramidingdepyramiding process congress reasoned that the imposition of margin requirements could constrain the amount of borrowing and prevent excessive market volatility and subsequently gave the federal reserve jurisdiction over the level of margin requirements since 1934 the federal reserve

institutional ownership and changes in the s p 500 several recent articles have provided new evidence for the existence of price pressures by examining the price and volume effects associated with changes in the s p 500 the present study extends this work by examining actual changes in institutional holdings following both additions to and deletions from the s p 500 the results show that changes in institutional holdings in response to additions or deletions from the s p 500 are positively correlated in addition to providing further evidence for the existence of price pressure effects the results also provide evidence of the very large institutional elasticities of demand for stock in two recent articles in this journal shleifer 1986 and harris and gurel 1986 present important new evidence of the existence of price pressures by examining the price and volume effects associated with changes in the composition of the standard and poor s s p 500 market index specifically these authors interpret the strong increases in trading volume and economically and statistically significant increases decreases in share prices on the first trading day following additions to or deletions from the s p 500 as the result of increased decreased demand by institutional index funds rather than from information effects concerning the future return distributions of the newly listed delisted firms the results of similar price and volume studies conducted by woolridge and ghosh 1986 and lamoureux and wansley 1987 are also generally consistent with the predictions of the price pressure hypothesis while both schleifer 1986 and harris and gurel 1986 suggest that changes in institutional index fund holdings are responsible for the observed abnormal returns in response to s p 500 changes over the years between 1966 and 1983 their joint failure to examine actual institutional ownership changes following listing or delisting from the index does not allow for direct tests of this possibility this study presents results of such tests

dynamic lot sizing with batch ordering and truckload discounts this paper studies two important variants of the dynamic economic lot sizing problem that are applicable to a wide range of real world situations in the first model production in each time period is restricted to a multiple of a constant batch size where backlogging is allowed and all cost parameters are time varying several properties of the optimal solution are discussed based on these properties an efficient dynamic programming algorithm is developed the efficiency of the dynamic program is further improved through the use of monge matrices using the results developed for the first model an o n3log n algorithm is developed to solve the second model which has a general form of product acquisition cost structure including a fixed charge for each acquisition a variable unit production cost and a freight cost with a truckload discount this algorithm can also be used to solve a more general problem with concave cost functions

taxation wage controls and the informal sector abstract in this paper we study the effects of taxation and wage controls in a developing economy with an informal sector for that purpose we build a model with firm heterogeneity in which a formal and an informal sector endogenously emerge in some productive branches of the economy based on the assumption that the marginal cost of tax and regulation evasion increases with the size of the firm our model offers an explanation for the observed discontinuity in the distribution of firms size the missing middle three forms of dualism scale wage and evasion consistent with market segmentation are obtained the model accounts for the presence of waiting unemployment that seems particularly pervasive in urban regions a computable general equilibrium cge model for cameroon is built incorporating these features various reforms of the tax and regulation system are simulated and their effects on the extent of the informal sector are analyzed

informality and rent seeking bureaucracies in a model of long run growth abstract this paper explores the links among growth the informal economy and rent seeking bureaucracies the presence of congestion associated with the enforcement of property rights implies that informality can be useful whether bureaucratic rent seeking is detrimental to growth then depends on how good a substitute informality is to production in the formal sector in order to create profits which can be appropriated rent seeking bureaucrats limit entry into the formal economy as a result firms operate in the informal sector even when the cost of informality is high in which case lower growth emerges however when the cost of informality is low a large number of firms choose to operate informally irrespective of entry conditions in the latter case growth is unaffected by a rent seeking bureaucracy as entry restrictions in the formal economy do not bind

dynamic version of the economic lot size model this article originally appeared in management science october 1958 volume 5 number 1 pp 89 96 published by the institute of management sciences a forward algorithm for a solution to the following dynamic version of the economic lot size model is given allowing the possibility of demands for a single item inventory holding charges and setup costs to vary over n periods we desire a minimum total cost inventory management scheme which satisfies known demand in every period disjoint planning horizons are shown to be possible which eliminate the necessity of having data for the full n periods

animal spirits margin requirements and stock price volatility a simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices investors are assumed to exhibit heterogeneous preferences for risk bearing the distribution of which evolves stochastically across generations this framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility depending upon the microeconomic structure behind fluctuations in economy wide average risk bearing propensity the ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs beyond their prudential functions the effects of initial margin requirements on securities markets are not well understood many have argued based upon empirical findings that the level of margin requirements has no discernable impact on stock price behavior nevertheless the view that high margin requirements dampen speculative excesses and reduce excess price volatility remains popular the simultaneous existence of such views highlights the uncertainty surrounding this issue in fact there exists no rigorously articulated theory of the interaction between initial margin requirements and stock prices and their returns characteristics in this paper we construct a simple dynamic model useful for characterizing the effects of initial margin requirements on security prices and returns to analyze the impact of margins we introduce investor heterogeneity into an otherwise simplified overlapping generations olg economy 2 the olg models are constructed so that each generation displays heterogeneous preferences or beliefs the distribution of which evolves stochastically across generations in each of two heterogeneous taste models we consider there are two types of agents one of which is more risk tolerant than the other in one model the

on the effectiveness of the federal reserve s margin requirement a portfolio theoretic model of the optimal margin account is developed it is argued that the federal reserve s goal in setting the margin requirement is to influence investor equity ratios using the average equity ratio as the dependent variable and the arguments of the model as independent variables an empirical model is estimated it is concluded that the margin requirement is an effective regulatory tool the state of the art with respect to the question of the effectiveness of the federal reserve s initial margin requirement is anomalous notwithstanding the profession s current obsession with the tools of monetary policy there are only two extant studies dealing with the central issue the effect of changes in regulation t on margin credit extended by securities dealers 1 moreover the two studies that do exist reach opposite conclusions one that the margin requirement is effective the other that it is not both studies are quite dated the first that of bogen and krooss 1 examined the behavior of various stock market series in the six months before and after a change in the margin requirement one of their findings was that increases in customer net debit balances always either slowed or reversed when the margin requirement was raised and conversely for decreases in the margin requirement on the basis of this evidence bogen and krooss concluded that changes in the margin requirement have to date 1960 achieved the primary objective of limiting and regulating the volume of security credit 1 p 157 however bogen and krooss also found that the quantitative behavior of customer net debit balances seemed to bear no relation to the size of the change in the margin requirement

tax rates governance and the informal economy in high income countries i introduction informal economic activity was long thought to be a feature of developing countries formalization of business was supposed to go hand in hand with economic development however even among high income countries a large part of economic activity is informal according to schneider 2002 16 7 of gross domestic product gdp in high income oecd organisation for economic cooperation and development countries was informally produced in 2001 2002 the author defines the informal economy as all economic activities which would generally be taxable were they reported to the state tax authorities p 4 in this sense both the informal economy and tax evasion are measures of the same phenomenon while tax evasion refers to the amount of forgone tax revenues the term informal economy encompasses the amount of production that escapes taxation 1 schneider s 2002 estimates of the informal economy of 21 high income oecd countries are reproduced in figure 1 2 these numbers have been obtained by the so called currency demand approach which estimates currency demand as a function of interest rate per capita income proportion of wages and salaries in aggregate output and tax rates excess demand of currency caused by a rise in tax rates is attributed to an increase in the informal economy 3 thus while the currency demand approach establishes a relationship between increasing tax rates and increasing informality within a country it does not imply any built in relationship between tax rates and the size of the informal economy across countries figure 1 omitted numbers in figure 1 show that there are large differences in the size of the informal economy even across high income countries in greece the informal economy amounted to 28 5 of gdp while in the united states the estimate was 8 7 4 put differently the production of legal final goods and services worth 892 billion about 3 090 per capita went untaxed in the united states while in greece 49 billion about 4 380 per capita escaped taxation given these large differences in the size of the informal economy even across high income countries the following two questions arise what are the driving forces behind informal economic activity in high income countries and to what extent can differences in these driving forces account for cross country differences in informality a paper by davis and henrekson 2005 suggests a natural answer to the first question across 14 high income oecd countries the authors find a positive and significant relationship between tax rates and the size of the informal economy figure 2 replicates their results and shows the relationship between tax rates on income and consumption and social security contributions and the size of the informal economy however despite a positive relationship between tax rates and informality countries with equally high tax rates have strikingly different estimates of their informal economies in 1995 1996 spain and the netherlands had similar total tax rates on income and consumption and social security contributions of around 67 the netherlands informal economy was estimated to amount to 13 7 of gdp while the estimate for spain was 22 4 apart from tax rates additional forces seem to drive informality in high income countries low institutional quality and corruption are possible suspects their close relationship to the size of the informal economy has been highlighted by various empirical studies friedman et al 2000 chong and gradstein 2007 and johnson kaufmann and zoido lobaton 1998 all find a positive relationship between low institutional quality a large regulatory burden corruption and the size of the informal economy the relationship between institutional quality and informality also holds across the sample of 21 high income countries figure 3 shows the negative relationship between the size of the informal economy and the commonly used world bank governance indicators on government effectiveness regulatory quality rule of law and control of corruption