why is corruption less harmful to income inequality in latin america summary conventional wisdom says corruption is bad for income inequality but recent research on latin america finds a trade off between corruption and inequality and suggests this is due to the large informal sector in the region using data on a large sample of countries we find that the informal sector impacts the link between corruption and inequality in particular the marginal impact of corruption becomes negative once the informal sector becomes large this is true in latin america and more generally corruption reducing policies should be accompanied by measures that help displaced informal sector workers

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

measuring the impacts of teachers ii teacher value added and student outcomes in adulthood abstract are teachers impacts on students test scores value added a good measure of their quality this question has sparked debate partly because of a lack of evidence on whether high value ad

reward structures and the allocation of talent as relative rewards that different professions receive are a key factor in the allocation of talent what determines the reward structure of a society is an important question this paper develops an equilibrium model of the allocation of talent between productive and unproductive activities such as rent seeking the existence of rent seeking creates a negative externality on productive agents and implies that relative rewards are endogenously determined the same externality can also lead to the existence of multiple equilibria each with different reward structures in a dynamic setting allocations of past generations as well as expectations of future allocations influence current rewards and the society may get trapped in a rent seeking steady state equilibrium the paper also discusses how the non pecuniary reward structure can be influenced by equilibrium selection and a historical example that suggests the presence of a causal link from the allocation of talent to non pecuniary rewards

informal firms in developing countries entrepreneurial stepping stone or consolation prize the potential dynamic benefits of a firm having the option to adopt informal status are analysed informality may be a stepping stone without which formality may never be achieved this result is obtained for a broad range of realistic parameter values suggesting a potential dynamic case for government support of informal firms informality may alternatively play a converse role as a consolation prize with a firm only entering an industry formally because it recognizes that if profitability is disappointing it can switch to informality however this result is obtained for a range of parameter values so narrow as to be of no practical significance

the bathsheba syndrome the ethical failure of successful leaders reports of ethical violations by upper level managers continue to multiply despite increasing attention being given to ethics by firms and business schools much of the analysis of these violations focuses on either these managers lack of operational principles or their willingness to abandon principles in the face ofcompetitive pressures much of the attention by firms and business schools focuses either on the articulation of operational principles a deontological approach or on the training of managers to sort their way through subtle ethical dilemmas in the face of competitive pressure a utilitarian approach while valuable these approaches alone are incomplete

poverty and the shadow economy the role of governmental institutions this paper examines the impact of poverty on the size of the shadow economy using cross country panel data for over 100 countries for the period 1991 2015 the results show that poverty has a positive and significant effect on the size of the shadow economy furthermore we argue that the quality and size of governmental institutions matter in moderating the impact of poverty on the shadow economy considering the interactions between poverty and government quality and size we find that poverty has the largest effect on the size of the shadow economy when government quality is the lowest and the size of the government is the largest these results withstand a battery of robustness checks

moving to opportunity in boston early results of a randomized mobility experiment this paper examines the short run impacts of a change in residential neighborhood on the well being of low income families using evidence from a program in which eligibility for a housing voucher was determined by random lottery we examine the experiences of households at the boston site of moving to opportunity mto a demonstration program in five cities families in high poverty public housing projects applied to mto and were assigned by lottery to one of three groups experimental offered mobility counseling and a section 8 subsidy valid only in a census tract with a poverty rate of less than 10 percent section 8 comparison offered a geographically unrestricted section 8 subsidy or control offered no new assistance but continued to be eligible for public housing our quantitative analyses of program impacts uses data on 540 families from a baseline survey at program enrollment a follow up survey administered l to 3 5 years after random assignment and state administrative data on earnings and welfare receipt 48 percent of the experimental group and 62 percent of the section 8 comparison group moved through the mto program one to three years after program entry families in both treatment groups were more likely to be residing in neighborhoods with low poverty rates and high education levels than were families in the control group however while members of the experimental group were much more likely to be residing in suburban communities than were those in the section 8 group the lower program take up rate among the experimental group resulted in more families remaining in the most distressed communities households in both treatment groups experienced improvements in multiple measures of well being relative to the control group including increased safety improved health among household heads and fewer behavior problems among boys experimental group children were also less likely to be a victim of a personal crime to be injured or to experience an asthma attack there are no significant impacts of either mto treatment on the employment earnings or welfare receipt of household heads in the first three years after random assignment

does reducing unemployment insurance generosity reduce job match quality abstract this paper analyzes how a change in slovenia s unemployment insurance law affected the quality of jobs workers found after periods of unemployment taking advantage the natural experiment we show through difference in differences estimation results that reducing the potential duration of unemployment benefits had no detectable effect on wages on the probability of securing a permanent rather than a temporary job or on the duration of the post unemployment job

cashier or consultant entry labor market conditions field of study and career success we measure impacts of entry conditions on labor market outcomes for the us college graduating classes of 1974 2011 a large recession reduces initial earnings by 10 through full time work and wag

did higher inequality impede growth in rural china this paper estimates the relationship between initial village inequality and subsequent household income growth for a large sample of households in rural china using a rich longitudinal survey spanning the years 1987 2002 and controlling for an array of household and village characteristics the paper finds that households located in higher inequality villages experienced significantly lower income growth through the 1990s however local inequality s predictive power and effects are significantly diminished by the end of the sample the paper exploits several advantages of the household level data to explore hypotheses that shed light on the channels by which inequality affects growth biases due to aggregation and heterogeneity of returns to own resources previously suggested as candidate explanations for the relationship are both ruled out instead the evidence points to unobserved village institutions at the time of economic reforms that were associated with household access to higher income activities as the source of the link between inequality and growth the empirical analysis addresses a number of pertinent econometric issues including measurement error and attrition but underscores others that are likely to be intractable for all investigations of the inequality growth relationship

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

analyzing the determinants of the shadow economy with a separate approach an application of the relationship between inequality and the shadow economy this paper suggests a separate approach to analyze the determinants of the shadow economy se it is applied to investigate the relationship between inequality and the se on a cross section of 118 countries we disentangle the effect of inequality on the se ratio by estimating both direct and indirect effects on both the numerator and denominator of the ratio separately we find that an increase in inequality increases the se ratio this positive correlation is primarily due to a reduction in the official gdp rather than an increase in the se

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

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

the effect of liquidity constraints on consumption a cross sectional analysis this paper examines the effect of liquidity constraints on consumption expenditures using a single year cross section data set a reduced form equation for consumption is estimated on high saving households by the tobit procedure to account for the selectivity bias since high saving households are not likely to be liquidity constrained the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross section data when the reduced form equation is used to predict desired consumption the gap between desired consumption and measured consumption is most evident for young households

uses and abuses of estimates of the underground economy ered valuable by at least a part of society narcotics production and distribution prostitution gambling these activities can be large in some countries and should be counted in the national accounts of all countries although they rarely are their omission affects the comparability of data across countries the incomes generated by illegal activities are rarely taxed many other activities such as those associated with the subsistence or informal sectors are estimated rather than measured and are generally not taxed because of the low value they generate to those who engage in them in conclusion there are many reasons beside the ones discussed in this paper why the measurements of national output may not be complete about two decades ago a few economists became convinced that many normal economic activities that should be measured and taxed were taking place underground or in the shadow thus presumably escaping the attention of the statistical offices of the tax authorities and more generally of the government regulators some of these economists also claimed that like alice in wonderland these hidden activities were growing in a ridiculous fashion see gutmann 1977 and feige 1979 by the late 1970s the role of government had grown enormously so that the level of taxation and the tax rates had risen sharply and regulations had proliferated in many countries see tanzi and schuknecht 1997 these developments had created strong incentives for individuals and enterprises to go underground to avoid taxes and regulatory restrictions thus a good case could be made that what came to be called the underground economy was a phenomenon to worry about newspaper articles were ready to accept the

channeling fisher randomization tests and the statistical insignificance of seemingly significant experimental results i follow r a fisher s the design of experiments 1935 using randomization statistical inference to test the null hypothesis of no treatment effects in a comprehensive sample of 53 experimental papers drawn from the journals of the american economic association in the average paper randomization tests of the significance of individual treatment effects find 13 to 22 fewer significant results than are found using authors methods in joint tests of multiple treatment effects appearing together in tables randomization tests yield 33 to 49 fewer statistically significant results than conventional tests bootstrap and jackknife methods support and confirm the randomization results

true world income distribution 1988 and 1993 first calculation based on household surveys alone the paper derives world income or expenditure distribution of individuals for two years 1988 and 1993 it is the first paper to calculate world distribution for individuals based entirely on household survey data from 91 countries and adjusted for differences in purchasing power parity between the countries measured by the gini index inequality increased from an already very high 63 in 1988 to 66 in 1993 the increase was driven more by rising differences in mean incomes between the countries than by rising inequalities within countries the most important contributors were rising urban rural differences in china and slow growth of rural incomes in south asia compared to several large developed market economies

the effects of exposure to better neighborhoods on children new evidence from the moving to opportunity experiment the moving to opportunity mto experiment offered randomly selected families housing vouchers to move from high poverty housing projects to lower poverty neighborhoods we analyze mto s impacts on children s long term outcomes using tax data we find that moving to a lower poverty neighborhood when young before age 13 increases college attendance and earnings and reduces single parenthood rates moving as an adolescent has slightly negative impacts perhaps because of disruption effects the decline in the gains from moving with the age when children move suggests that the duration of exposure to better environments during childhood is an important determinant of children s long term outcomes jel i31 i38 j13 r23 r38

the devil is in the shadow do institutions affect income and productivity or only official income and official productivity this paper assesses the relationship between institutions output and productivity when official output is corrected for the size of the shadow economy our results confirm the usual positive impact of institutional quality on official output and total factor productivity and its negative impact on the size of the underground economy however once output is corrected for the shadow economy the relationship between institutions and output becomes weaker the impact of institutions on total corrected factor productivity becomes insignificant differences in corrected output must then be attributed to differences in factor endowments these results survive several tests for robustness

do liquidity constraints and interest rates matter for consumer behavior evidence from credit card data this paper utilizes a unique new dataset of credit card accounts to analyze how people respond to changes in credit supply the data consist of a panel of thousands of individual credit card accounts from several different card issuers with associated credit bureau data we estimate both marginal propensities to consume mpcs out of liquidity and interest rate elasticities we also evaluate the ability of different models of consumption to rationalize our results distinguishing the permanent income hypothesis pih liquidity constraints precautionary saving and behavioral models we find that increases in credit limits generate an immediate and significant rise in debt counter to the pih the average mpc out of liquidity ddebt dlimit ranges between 10 14 the mpc is much larger for people starting near their limits consistent with binding liquidity constraints however the mpc is significant even for people starting well below their limit we show this response is consistent with buffer stock models of precautionary saving nonetheless there are other results that conventional models cannot easily explain e g why so many people are borrowing on their credit cards and simultaneously holding low yielding assets unlike most other studies we also find strong effects from changes in account specific interest rates the long run elasticity of debt to the interest rate is approximately 1 3 less than half of this elasticity represents balance shifting across cards with most reflecting net changes in total borrowing the elasticity is larger for decreases in interest rates than for increases which can explain the widespread use of temporary promotional rates the elasticity is smaller for people starting near their credit limits again consistent with liquidity constraints

a new test of borrowing constraints for education we discuss a simple model in which parents and children make investments in the children s education investments for other purposes and parents can transfer cash to their children we show that for an identifiable set of parent child pairs parents will rationally under invest in their child s education for these parent child pairs additional financial aid will increase educational attainment the model highlights an important feature of higher education finance the expected family contribution efc that is based on income assets and other factors the efc is neither legally guaranteed nor universally offered our model identifies the set of families that are disproportionately likely to not provide their full efc using a common proxy for financial aid we show in data from the health and retirement study that financial aid increases the educational attainment of children whose families are disproportionately likely to under invest in education financial aid has no effect on the educational attainment of children in other families the theory and empirical evidence identifies a set of children who face quantitatively important borrowing constraints for higher education

liquidity affects job choice evidence from teach for america can access to a few hundred dollars of liquidity affect the career choice of a recent college graduate in a three year field experiment with teach for america tfa a prestigious teacher placement program we randomly increase the financial packages offered to nearly 7 300 potential teachers who requested support for the transition into teaching the first two years of the experiment reveal that although most applicants do not respond to a marginal 600 of grants or loans those in the worst financial position respond by joining tfa at higher rates we continue the experiment into the third year and self replicate our results for the highest need applicants an extra 600 in loans 600 in grants and 1 200 in grants increase the likelihood of joining tfa by 12 2 11 4 and 17 1 percentage points or 20 0 18 7 and 28 1 respectively additional grant and loan dollars are equally effective suggesting a liquidity mechanism a follow up survey bolsters the liquidity story and also shows that those drawn into teaching would have otherwise worked in private sector firms

the impact of unemployment insurance generosity on match quality distribution abstract this paper investigates the impact of unemployment insurance ui generosity on the distribution of match tenure we show that more generous ui increases expected tenure reducing the mass of the lower tail of match duration and increasing the duration of matches available this impact is differentiated across education levels with the larger benefits accruing to the less educated

taxes inequality and the size of the informal sector abstract in this note we develop a simple heterogeneous agent model with incomplete markets to explain the prevalence of a large low productivity informal sector in developing countries in our model taxes levied on formal sector agents are used to finance the provision of a productive public infrastructure which creates a productivity premium from formalization our model offers endogenous differentiation of rich and poor countries complete formalization is an equilibrium only in countries with the appropriate initial conditions we discuss the existence of this equilibrium and highlight the ambiguous effect of taxes

property rights corruption and the allocation of talent a general equilibrium approach we consider an economy where contracts are necessary to encourage investments contract enforcement requires that a fraction of the agents work in the public sector and do not accept bribes we find that 1 it may be optimal to allow some corruption and not enforce property rights fully 2 less developed economies may choose lower levels of property right enforcement and more corruption 3 there may exist a free lunch such that over a certain range it is possible simultaneously to reduce corruption increase investment and achieve a better allocation of talent bureaucratic corruption is widespread in many societies casual empiricism and case studies suggest that corruption distorts the allocation of resources and discourages investment and the creation of new firms e g mydral 1968 desoto 1989 cross country studies also find that countries with high corruption or long bureaucratic delays suffer lower growth e g mauro 1996 sartre 1997 it is therefore tempting to conclude that government policies and bureaucratic corruption are at least partly responsible for the lack of development or slow growth of many economies e g shleifer and vishny 1993 nevertheless governments and bureaucracies do not exist only to seek rents they perform a number of useful functions including provision of public goods correction of market failures and redistribution without understanding why the state exists it is difficult to assess why corruption arises what its consequences are and whether and how it should be prevented in this paper we analyse how the employees of the state bureaucrats can misuse their power to enforce property rights the protection of property rights is commonly viewed as one of the most important roles of the state by political philosophers as diverse as david hume karl marx and robert nozick while a number of social scientists including north and thomas 1973 and rosenberg and bridzell 1989 emphasise the importance of secure property rights in the development of western societies for the state to have a role in enforcing property rights some contractual problems must exist between private parties in our economy these contractual problems are between entrepreneurs in particular production requires two agents and one of the entrepreneurs needs to undertake an investment but the returns accrue to the other one this can be thought as a partnership with the first agent as an upstream supplier providing an input of variable

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

cash on hand and competing models of intertemporal behavior new evidence from the labor market this paper presents new tests of the permanent income hypothesis and other widely used models of household behavior using data from the labor market we estimate the excess sensitivity of job search behavior to cash on hand using sharp discontinuities in eligibility for severance pay and extended unemployment insurance ui benefits in austria analyzing data for over one half million job losers we obtain three empirical results 1 a lump sum severance payment equal to two months of earnings reduces the job finding rate by 8 12 on average 2 an extension of the potential duration of ui benefits from 20 weeks to 30 weeks similarly lowers job finding rates in the first 20 weeks of search by 5 9 and 3 increases in the duration of search induced by the two programs have little or no effect on subsequent job match quality using a search theoretic model we show that estimates of the relative effect of severance pay and extended benefits can be used to calibrate and test a wide set of intertemporal models our estimates of this ratio are inconsistent with the predictions of a simple permanent income model as well as naive rule of thumb behavior the representative job searcher in our data is 70 of the way between the permanent income benchmark and credit constrained behavior in terms of sensitivity to cash on hand

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