corruption and the shadow economy one way or two way street this paper attempts to bring some resolution to the relation between corruption and the shadow economy while previous research focuses on the static relationship between the two we account for dynamics using a panel vector autoregression model and consider influences from the official economy and institutional quality using cross national panel data for 108 countries over the period 1984 2006 results show a bidirectional relationship with initial complementarity and substitution over time thus the nature of the two way street is shown to change over time and our consideration of dynamics reveals the complementarity substitution switch

factors influencing the incidence of bribery payouts by firms a cross country analysis this article explores micro and macro level variables that influence the incidence of bribery payouts by firms a rich data set with information from 55 countries was utilized to achieve this objective results of logit regression models indicate that there are a number of micro and macro level factors that significantly affect the incidence of bribery payouts this suggests that it is not only the characteristics of a firm but also the environment of doing business that affect the firm s bribery decision the results of this study provides information that may help firms develop strategies to reduce corruption in their respective industries and thereby improve their image of corporate social responsibility the analysis also points to possible policy directions that governments could undertake in order to reduce the incidence of bribery in their country

social influence and mne strategic response to political risk a global network approach abstract according to the conventional view of mne host country relations mnes faced with political risk condition their strategic responses on each party s relative power positions or bargaining influence drawing insight from network theory institutional theory and international relations research i argue that firm sensitivity to political risk is contingent upon a complementary concept social influence social influence arises through the mutual embeddedness of mne and host government in a complex global network of nations to test my hypotheses i construct a global network of trade relations that i combine with a unique transaction level dataset from the global petroleum industry my results demonstrate that social influence as modeled by home host structural equivalence moderates the effects of political risk further my findings provide support for a conceptual and empirical distinction between social influence and the traditional bargaining influence examined in the literature

taxing the unobservable the impact of the shadow economy on inflation and taxation summary because the shadow economy cannot be taxed it erodes the tax base and reduces tax revenues forcing governments to resort to other ways to finance their expenditures accordingly a larger shadow economy should give governments an incentive to shift revenue sources from taxes to inflation in line with the public finance motive of inflation in this paper we recall that point in a simple canonical model then empirically test it in a sample of up to 153 developed and developing countries over the 1999 2007 period in line with the model s prediction we indeed observe a positive relation between inflation and the size of the shadow economy and a negative relation between the tax burden and the size of the shadow economy we find that both relations are conditional on central bank independence and on the exchange rate regime implying that it is the strongest in institutional set ups that constrain monetary policy the least both relations are present in the sub sample of developed countries as well as the sub sample of developing countries both relations survive several robustness checks using various sets of control variables including the stock of debt controlling for endogeneity using alternative estimates of the shadow economy and estimating the two relations as a system of equations

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

the informal sector and the political economy of development this paper takes an initial step in integrating insights from two sets of literature which have focused on central aspects of development with unfortunate independence it highlights politically valuable resources which are identified in the political economy literature and shows that the informal sector literature provides ample evidence that these resources in general are i scarcely available to informal entities ii poorly valued in their possession and iii more often collectively unexploited by them overall there seems to be an important though neglected bias in how the political system in less developed countries formulates crafts and implements policy

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

the peter pan syndrome in emerging markets the productivity transparency trade off in it adoption firms invest in technology to increase productivity yet in emerging markets where a culture of informality is widespread information technology it investments leading to greater transparency can impose a cost through higher taxes and the need for regulatory compliance the tendency of firms to avoid productivity enhancing technologies and remain small to avoid transparency has been dubbed the peter pan syndrome we examine whether firms make the trade off between productivity and transparency by examining it adoption in the indian retail sector we find that computer technology adoption is lower when firms are motivated to avoid transparency specifically technology adoption is lower when there is greater corruption but higher when there is better enforcement and auditing so firms have a higher productivity gain threshold to adopt computers in corrupt business environments that suffer from patchy and variable enforcement of the tax laws not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption thus in addition to their direct effects on the economy enforcement auditing and corruption can have indirect effects through their negative impact on adoption of productivity enhancing technologies that also increase operational transparency

the informal sector and tax on employment a dynamic general equilibrium investigation abstract this paper elaborates on the evolution of the informal sector vis a vis the evolution of agricultural and formal sectors in a developing country economy in process of growth the analytical contribution of this essay extends the ramsey theory of growth into a framework that includes an informal sector and household preferences that display engel effects in agricultural and in informally produced goods besides showing that the informal sector s importance diminishes over time as the country s economy grows the results from the model demonstrate that a country can successfully reduce its informal employment by reducing tax on employment in the formal sector

tax evasion the underground economy and financial development abstract we study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation agents with heterogeneous skills seek loans in order to undertake risky investment projects asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self selection in a separating equilibrium faced with these contracts agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations the key implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development thus in accordance with empirical observation we establish the result that the lower is the stage of such development the higher is the incidence of tax evasion and the greater is the size of the underground economy

might fundamental tax reform increase criminal activity fundamental tax reform replacing the income tax with a sales tax is commonly thought to reduce levels of criminal and other underground economic activity by implicitly taxing their returns this paper finds instead that the impact of tax reform depends on the relative labour intensity of production in the legitimate and illegitimate sectors of the economy in the likely event that illegitimate output is produced by using more labour intensive techniques than is legitimate output then replacing an income tax with a sales tax reduces the cost of criminal and other underground activity thereby stimulating its growth

informal work networks we present a model of time allocation between formal and informal labour supply where workers learn of informal job opportunities from their peers in addition to formal income taxation and enforcement individuals labour supply decisions depend on the number of their peers with informal jobs and the strength of social ties workers allocate more time to informal activities when tax enforcement is lax and job information transmission is good more connected social networks e g wheel complete feature lower average income but higher average utility than poorly connected social networks e g star empty average income may be non monotonic in tax enforcement on presente un modele d allocation du temps entre l offre de travail formel et informel dans le cas ou les travailleurs apprennent l existence de possibilites de travail informel de leurs pairs en plus de dependre de l imposition des revenus formels et de la rigueur de ce processus les decisions des individus dans leur offre de travail dependent du nombre des pairs qui ont du travail informel et de la force des liens sociaux les travailleurs allouent plus de temps aux activites informelles quand l application de la loi fiscale est rel chee et que la transmission de l information a propos du travail informel est bonne des reseaux sociaux mieux connectes e g roue complet se traduisent par un revenu moyen plus bas mais par une utilite moyenne plus elevee que des reseaux sociaux plus pauvrement connectes e g etoile vide le revenu moyen peut avoir un lien non monotone a la nature de l application de la loi fiscale

informal sector regulatory compliance and leakage abstract the paper models a vertically related formal and informal sector and endogenizes the size and regulatory compliance status of the informal sector when the formal sector can circumvent costly regulations by outsourcing polluting intermediate goods from the informal sector stricter regulations increase when the composition effect of regulation dominates its scale effect or decrease total pollution and may even have a non monotonic impact we identify conditions under which a partially compliant informal sector acts as a source of leakage and examine implications for optimal enforcement policy further we show that price discrimination by the formal sector when it purchases the intermediate goods from the informal sector can worsen regulatory compliance by the informal sector and lead to more pollution

a comparative study of inequality and corruption this article argues that income inequality increases the level of corruption through material and normative mechanisms the wealthy have both greater motivation and more opportunity to engage in corruption whereas the poor are more vulnerable to extortion and less able to monitor and hold the rich and powerful accountable as inequality increases inequality also adversely affects social norms about corruption and people s beliefs about the legitimacy of rules and institutions thereby making it easier for them to tolerate corruption as acceptable behavior this comparative analysis of 129 countries using two stage least squares methods with a variety of instrumental variables supports the authors hypotheses using different measures of corruption the world bank s control of corruption index and the transparency international s corruption perceptions index the explanatory power of inequality is at least as important as conventionally accepted causes of corruption such as economic development the autho

signalling product quality when is price relevant abstract price has long been regarded as performing a dual role in the demand for products with unknown quality it represents the opportunity cost of the product and is one of several signals which indicate quality we argue that when quality signals are stochastic not all of them will be used in particular there will be a critical price above below which price is used not used to signal quality at this price an individual s demand curve will be characterised by a reverse kink this helps explain recent results from demand analysis including those reported by abbe decarroux in this journal

corruption centralization and the shadow economy in their pioneering work on corruption shleifer and vishny 1993 find that a centralized bureaucracy results in lower bribes our paper extends the analysis to economies with formal and informal sectors when corrupt officials operate in both sectors bureaucratic centralization is beneficial when confined to the formal sector however we show that crosssector centralization can result in higher bribes and lower welfare furthermore contrary to choi and thum 2005 we demonstrate that depending on the organization of the bureaucracy and the productivity of the informal sector the presence of the shadow economy may have adverse effects on corruption and welfare

why do firms hide bribes and unofficial activity after communism abstract our survey of private manufacturing firms finds the size of hidden unofficial activity to be much larger in russia and ukraine than in poland slovakia and romania a comparison of cross country averages shows that managers in russia and ukraine face higher effective tax rates worse bureaucratic corruption greater incidence of mafia protection and have less faith in the court system our firm level regressions for the three eastern european countries find that bureaucratic corruption is significantly associated with hiding output

coming out of the shadows estimating the impact of bureaucracy simplification and tax cut on formality in brazilian microenterprises abstract this paper evaluates the impact of a program of bureaucracy simplification and tax reduction on formality among brazilian microenterprises the simples program we document an increase of 13 percentage points in formal licensing among retail firms created after the program when compared to firms in ineligible sectors the impact on retailers is robust to a series of tests we find no impact on construction transportation services and manufacturing sectors

unemployment and international shadow economy gender differences abstractadding to the body of research on cross country determinants of the informal economy this article studies how unemployment differences across gender drive the propensities to work in the informal sector results accounting for possible simultaneity between unemployment and the shadow economy show that unemployed males rather than unemployed females were more likely to operate underground these findings about greater male propensities are generally robust to alternative considerations

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

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

inflation and relative price variability the case of internationally traded primary commodities abstract we examine the link between inflation and relative price variability for internationally traded primary commodities larger and unexpected movements in commodity prices induce greater relative price variability thus our results generally mirror similar findings for the prices of finished products

search and taxation in a model of underground economic activities i introduction it is widely recognized that one major effect of taxation is to stimulate activities in the so called underground or shadow economy indeed the extent of underground activities even in the western countries is by no means negligible schneider and enste 2000 report that the size of the shadow economy as percent of gross domestic product gdp in the organisation for economic co operation and development oecd countries in 1996 ranged from 7 5 in switzerland to 28 5 in greece this existence of underground activity is a significant source for concern the possibility of evading taxes makes taxation less efficient by undermining the tax base this possibility may jeopardize long run scope for financing adequate public services furthermore it implies that official measures of for example income and unemployment which form the basis for policy will necessarily be biased the purpose of this article is to suggest a simple micro founded framework for studying the relationship between tax policy and underground economic activities a defining characteristic of the latter is that they are illegal 1 the traditional approach starting with the seminal contribution of allingham and sandmo 1972 characterizes tax evasion as an activity for which there is a risk of detection 2 this approach however does not particularly highlight that underground economic activity involves trade we argue that although underground economic activities and regular activities are similar and can coexist one effect of the illegal status of the former is to differentiate the amount of information that is available in the two market segments whereas information about trading opportunities in regular markets can be assumed to be perfect because underground activity is by definition furtive information about trading opportunities in this segment will be less than perfect traditionally search theory has been used to capture the notion of imperfect information in markets this has a natural interpretation in the current context though trading in the regular market can be regarded as frictionless an agent wishing to trade in the underground sector must devote some time and effort to locating trustworthy trading partners with whom he or she can trade illegally at no risk hence we model underground trade as the outcome of a standard bilateral search process where buyers and sellers devote some time to locating each other and implicitly verifying each others trustworthiness 3 this process individually rational when facing taxes is a socially wasteful activity because it subtracts effort from physical production the model identifies a natural link between participation in the underground economy and individual characteristics this is important for analysis of micro level data our model suggests that individuals with lower earnings capacity are more active in underground economic activities hence the model predicts a negative correlation between individual participation in the underground economy and for example hourly wage and education from the evidence that is available this seems consistent with the data 4 the current model can be used as a framework for future empirical work using micro data because it can fairly easily be extended to include other features such as unemployment and variation across industries in the technology available for underground production to make further predictions about individual involvement in underground activities the systematic relation between earnings capacity and participation in the underground economy is also relevant for policy design consider the implementation of a redistributive tax although the tax aims at improving the welfare of the individuals with low earnings capacity the same individuals can benefit from trading in a relatively large underground economy if the tax is only mildly enforced

the underground economy in the late 1990s evading taxes or evading competition summary this paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s i propose a novel explanation for this phenomenon the sharp increase in market competition worldwide which reduces prices and profits and drives firms into the shadow economy empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy the effect is strongest in low tax high corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure

shadow economy and unemployment rate in u s a is there a structural relationship an empirical analysis this article aims to estimate the size of the us shadow economy se using a structural equation approach and to evaluate if a structural relationship exists between the se and the unemployment rate ur in the united states the size of the se is estimated to be decreasing over the last two decades we corroborate the existence of a structural relationship between the se and the ur by using a simple theoretical model furthermore we extend the okun s law to estimate the structural relationship between growth rate of official gdp se and ur our results indicate a significant positive relationship between the se and the ur

legitimacy and the benefits of firm formalization entrepreneurs in many emerging economies start their firms informally without registering with the state we examine how informality at the time of founding affected the performance of 12 146 firms in 18 countries across sub saharan africa our findings indicate that entrepreneurs who registered their firms at founding enjoyed greater success in terms of sales and employment but these benefits varied widely across countries consistent with the idea that legitimation processes account for these benefits countries in which people trust their government more had larger advantages associated with being formal

sovereign debt markets in light of the shadow economy we investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets in addition to a standard ordered probit regression we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs mlp neural networks offer the best fit to the data followed by the rbf neural networks and probit regression respectively the results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector our study has important implications especially in the context of the ongoing sovereign debt crisis since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs finally a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

princes and merchants european city growth before the industrial revolution as measured by the pace of city growth in western europe from 1000 to 1800 absolutist monarchs stunted the growth of commerce and industry a region ruled by an absolutist prince saw its total urban population shrink by one hundred thousand people per century relative to a region without absolutist government this might be explained by higher rates of taxation under revenue maximizing absolutist governments than under nonabsolutist governments which care more about general economic prosperity and less about state revenue

does taking the shadow economy into account matter when measuring aggregate efficiency we analyze how adding the shadow economy to official output figures affects estimated technical efficiency at the country level we find that this only slightly affects the ranking of efficiency scores but increases average efficiency in a sample of 87 to 97 countries both developed and developing our results are robust to the functional form of the production technology and the adjustment of labour to account for years of schooling

tax evasion in transition outcome of an institutional clash testing feige s conjecture in albania a field survey of households was conducted in tirana albania in 2000 a response rate of 89 3 yielded 1 340 valid questionnaires allowing me to test feige s in nelson j m tilley c walker l eds transforming post communist political economics national academy press washington dc p 21 conjecture that more tax evasion will be observed when formal and informal institutions clash respondents attitudes towards formal and informal institutions were obtained by applying factor analysis to their responses to a series of attitudinal questions the theoretical importance of the interaction between formal and informal institutions in determining tax evasion finds empirical support in the data

local autonomy tax morale and the shadow economy policymakers often propose strict enforcement strategies to fight the shadow economy and to increase tax morale however there is an alternative bottom up approach that decentralises political power to those who are close to the problems this paper analyses the relationship with local autonomy we use data on tax morale at the individual level and macro data on the size of the shadow economy to analyse the relevance of local autonomy and compliance in switzerland the findings suggest that there is a positive negative relationship between local autonomy and tax morale size of the shadow economy

how much income redistribution an explanation based on vote buying and corruption this paper studies how income tax rates are determined and how they are related to government corruption in the form of fund capture a model is presented where rich voters can block redistribution by buying the votes of some poor voters in equilibrium there is only limited redistribution and income tax rates are a negative function of government corruption when rich voters can bribe the government an additional equilibrium with zero taxation is possible the link between corruption and tax rates is tested using cross country data the empirical evidence is fully consistent with the predictions of the model

can informal firms hurt registered smes access to credit using firm level survey responses from 2009 to 2012 we examine whether competitors from the informal sector affect the credit constraints of registered smes in 86 countries worldwide we also investigate the role played by the quality of institutional environment in exacerbating or in alleviating such effect a weak quality of institutional environment strengthens inter linkages between the formal and the informal sectors increases the costs and decreases the benefits assumed by formal firms and reduces the costs attributed to informality moreover it also results in a large informal economy which influences perceptions about the substitutability between formal and informal goods and law evasion our findings indicate that registered smes facing competition from informal firms are more likely to be credit constrained than other formal smes that are not confronted with such competition this result is consistent with the parasite view and the entrepreneurial perspective of informality which assert that informal firms are capable of competing against registered smes and hurting the latter s profits further we find that such adverse impact manifests only in countries with weak rule of law and high degree of corruption and bureaucracy our results also show that registered micro and small firms are more likely to be affected by the presence of informal firm competitors than medium sized firms this is because the benefits of formality that include access to credit from financial institutions increase with firm size on the whole our findings suggest that governments must enhance their role in increasing access to credit to smaller firms and in providing incentives for informal firms to be integrated in the formal economy moreover in order to achieve inclusive growth our results highlight the importance of improving the business environment which affects all entrepreneurs

corruption and the shadow economy an empirical analysis this paper analyzes the influence of the shadow economy on corruption and vice versa we hypothesize that corruption and the shadow economy are substitutes in high income countries while they are complements in low income countries the hypotheses are tested for a cross section of 98 countries our results show that there is no robust relationship between corruption and the size of the shadow economy when perceptions based indices of corruption are used employing an index of corruption based on a structural model however corruption and the shadow economy are complements in countries with low income but not in high income countries

characteristics of households in the informal sector of an emerging economy using the case study of trinidad and tobago we investigate the socio economic demographic and attitudinal characteristics of households that participate in the informal sector of an emerging economy and their perception of the risk of detection by tax authorities while doing so data are gathered from a cross sectional field survey covering 570 households results using multinomial logit and ordered probit models suggest that households are motivated to participate in the informal sector when members spend little time in formal sector activity believe that taxes are too high and their incomes are too low have dependents to support and believe that the resulting tax evasion will go undetected their perception of the risk of detection by the tax authority is determined largely by the income they earn in the formal sector and the extent of government bureaucracy prevailing there

can corruption foster regulatory compliance the legal and economic literatures overwhelmingly support the notion that regulatory compliance is always less in the presence of corruption this paper departs from those literatures and shows that whenever public officials are paid fixed wages an increase in corruption may actually foster compliance the conditions that make this possible are laid down in a theoretical model empirical evidence that corroborates the theoretical findings is provided using firm level data for 26 transition economies

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

decentralization and the shadow economy oates meets allingham sandmo this article studies the impact of decentralization on the shadow economy we argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels 1 decentralization enhancing public sector efficiency efficiency effect and 2 decentralization reducing the distance between bureaucrats and economic agents which increases the probability of detection of shadow economic activities deterrence effect using various measures of fiscal political and government employment decentralization in a cross section of countries we find the deterrence effect to be of more importance the deterrence effect is stronger the lower the degree of institutional quality we find no robust evidence of the efficiency effect

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

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

is corruption an efficient grease this paper tests whether corruption may be an efficient grease in the wheels of an otherwise deficient institutional framework it analyzes the interaction between aggregate efficiency corruption and other dimensions of governance for a panel of 69 countries both developed and developing using two measures of corruption and two other aspects of governance we observe that corruption is less detrimental to efficiency in countries where institutions are less effective it may even be positively associated with efficiency in countries where institutions are extremely ineffective we thus find evidence for the grease the wheels hypothesis in its weak and strong forms

property rights protection corporate transparency and growth in countries with secure property rights corporate transparency improves investment efficiency and increases growth by alleviating information asymmetry however in countries with insecure property rights greater transparency can increase the risk of government expropriation therefore some firms that would benefit most from transparency cannot take full advantage of it as they set sub optimal transparency levels using data from 59 industries in 69 countries we find that in countries with weak property rights protection industries that would benefit the most from transparency exhibit worse investment efficiency and grow more slowly than industries that can efficiently operate at minimal levels of transparency

informal sector the credit market channel abstract we build a model of firms choice between formality and informality complying with costly registration procedures allows the firms to benefit from key public goods enforcement of property rights and contracts that make the participation in the formal credit market possible in a moral hazard framework with credit rationing their decision is shaped by the interaction between the cost of entry into formality and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements the model is consistent with existing stylized facts on the determinants of informality

the hard shadow of the greek economy new estimates of the size of the underground economy and its fiscal impact this article presents new estimates of the greek underground economy and explores the link between the underground economy and aggregate debt we show that the greek underground economy has been underestimated heavily and has been on a rising trend again since greece adopted the euro we also present evidence that the size of the underground economy is positively related to the debt to gdp ratio implying that fighting the underground economy is also conducive to financial and macroeconomic stability our results suggest that for our sample of 11 emu member countries the loss of the inflation tax as an economic policy instrument had drastic consequences while the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the euro it has pushed up the debt to gdp ratio in our sample since

tax evasion investment shocks and the consumption puzzle a dsge analysis with financial frictions recent studies identify marginal efficiency of investment mei shocks as important drivers of the business cycle however dynamic stochastic general equilibrium dsge models struggle to explain macroeconomic comovements between consumption and the key real variables after a mei shock moreover engaging in tax evasion practices is often an answer to financial constraints which have been recognized as important determinants of cyclical fluctuations as well we use a medium scale new keynesian dsge model that combines tax evasion with financial frictions to simulate a mei shock we show that entrepreneurial tax evasion can solve the comovement problem to a fair extent

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

how does corruption affect public debt an empirical analysis summary this paper investigates the relationship between corruption the shadow economy and public debt it additionally examines whether the shadow economy increases the adverse effects of corruption on public debt the model is empirically tested for 126 countries over 1996 2012 using ordinary least squares ols fixed effects system generalized method of moments gmm and instrumental variable estimation and two measures of corruption the transparency international corruption perceptions index and the kaufmann et al corruption index results confirm that increased corruption and a larger shadow economy lead to an increase in public debt results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt similarly higher government expenditure enhances the effects of corruption on government debt hence reducing corruption should be a primary policy goal of governments given the complementarity detected between corruption and the shadow economy reducing corruption would also lead to a fall in the size of the shadow economy and public debt reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure

government effectiveness and regional variation in informal employment abstract this article analyses the role of government effectiveness in the determination of informal employment a theoretical model is developed in which local governance and worker skill level are assumed to influence the decision of the worker whether to seek employment in the formal or informal sectors the model is assessed empirically using data from brazil where almost half of the urban labour force is employed informally the empirical analysis supports the predictions of the model and suggests that the probability of a worker being employed informally is lower in regions with better governance and higher average education

the influence of governance infrastructure and corporate governance on profit shifting in this article we develop a conceptual model to examine the influence of quality of country level governance infrastructure and corporate governance effectiveness on profit shifting we empirically test propositions derived from the model with a unique firm level data set and using multiple indicators of governance infrastructure quality and corporate governance mechanisms we estimate that on average about 6 of total pre tax income is shifted out of foreign owned firms in india we show that governance infrastructure that improves collective action and transparency in both the foreign and host country reduces shifting on the other hand secure property rights and efficient contracting in the foreign country increases shifting we also find that monitoring by foreign institutional investors restricts shifting

some implications of the unofficial economy bureaucratic corruption relationship in transition countries abstract this paper shows why some countries are trapped in an equilibrium with high unofficial economic activity and corruption while other countries are not the potential for different outcomes follows directly from the complementary nature of unofficial economy and corruption activity

corruption cooperation and endogenous time discount rates virtually all uses of repeated games tostudy of cooperation assume that people stime discount rates are exogenous andfixed here we offer an evolutionary gameembedded in a multi period model ofinvestment and consumption in whichindividual time discounts are determined bytheir convergence to values determined byevolutionary stable strategies oursubstantive motivation though iscorruption and its relationship to economicgrowth to understand the observedrelationship between levels of corruptionand economic indicators of social welfare we argue that corruption is a form ofcooperation that requires closeinterpersonal monitoring if we assume moreover that when people discount thefuture greatly the only sustainable formsof cooperation are those that allow forclose monitoring then our analysis can beinterpreted as a dynamic model of therelationship between corruption andinvestment

myopic deterrence policies and the instability of equilibria we develop a general equilibrium model of crime in which honest workers face an effective tax rate on earnings consisting of an exogenous income tax used to pay for policing and an endogenous crime tax given by the proportion of their disposable income that is stolen when there are two stable equilibria the low crime equilibrium is welfare dominant and furthermore welfare is a decreasing function of the income tax rate however as the income tax rate is reduced the degree of stability of the low crime equilibrium diminishes until for sufficiently low tax rates the low crime equilibrium is unstable with respect to any small positive perturbation in the crime rate thus myopic maximization of social welfare exposes the economy to random shocks in the crime rate that can destroy the preferred low crime equilibrium we argue that this dilemma between economizing on resources used for deterrence and ensuring the stability of the most desirable equilibrium is a fundamental trade off in the design of many institutions intended to control antisocial behavior including rent seeking corruption and theft

why do firms evade taxes the role of information sharing and financial sector outreach tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis we show that firms in countries with better credit information sharing systems and higher branch penetration evade taxes to a lesser degree this effect is stronger for smaller firms firms in smaller cities and towns firms in industries relying more on external financing and firms in industries and countries with greater growth potential this effect is robust to instrumental variable analysis controlling for firm fixed effects in a smaller panel data set of countries and many other robustness tests

the impact of the judiciary on entrepreneurship evaluation of pakistan s access to justice programme abstract in 2002 the pakistani government implemented a judicial reform that cost 350 million or 0 1 of pakistan s 2002 gdp this reform did not involve increased incentives for judges to improve efficiency but merely provided them with more training nonetheless the reform had dramatic effects on judicial efficiency and consequently on entrepreneurship judges disposed of a quarter more cases and entry rate of new firms increased by half due to the reform using data from the world bank group entrepreneurship database our estimates suggest that this translates into an increase of pakistan s gdp by 0 5

the influence of direct democracy on the shadow economy we analyze both theoretically and empirically the influence of direct democratic institutions on the size and development of shadow economies our model suggests that as the extent of direct democracy increases implemented fiscal policies more nearly reflect the preferences of citizens and so reduce their incentives to operate in the informal sector this theory implies a negative relationship between the extent of direct democracy and the size of the country s shadow economy we also theorize that direct democracy has a greater effect in reducing the informal sector when the former is at low or intermediate values and when the electoral system is characterized by a larger district magnitude an empirical investigation of a sample of 57 democracies confirms our model s predictions

global corruption and the shadow economy spatial aspects using a large sample of nations this paper examines the relation between corruption and the shadow economy focusing especially on geographic spillovers the results point to complementarity between corruption and the shadow economy we find evidence of own contagion across nations in both corruption and shadow economy activity while cross contagion mostly points to substitution between own shadow economy corruption and neighboring corruption shadow economy these findings are fairly robust across different estimation techniques and measures of the shadow economy

is there an informal employment wage penalty evidence from south africa abstract we estimate the wage penalty associated with working in the south african informal sector to this end we use a rich data set on non self employed males that allows one to accurately distinguish workers employed in the informal sector from those employed in the formal sector and link individuals over time implementing various econometric approaches we find that there is a gross wage penalty of a little over 18 for working in the informal sector however once we reduce our sample to a group for which we can reasonably calculate earnings net of taxes and control for time invariant unobservables the wage penalty disappears

trust regulation and market failures abstract government regulation of firms is associated with more negative externalities and unofficial activity across countries i argue that this correlation mainly reflects causality going from concerns about market failures to demand for government intervention using trust in others as a proxy for such concerns i show that differences in trust explain a great deal of variation in entry regulations then controlling for trust in the regression of market failures on regulation the latter is no longer associated with worse economic outcomes the same result is confirmed when i exploit country population as an alternative source of variation in regulation

taxation and corruption theory and firm level evidence from uganda this article develops a simple framework to analyse the negotiation over bribe and tax payments during the tax collection process we show that the larger the bribe a firm offers to a tax collector the larger the tax rebate it gets more particularly we show that the negotiation over bribe and tax payments hinges on four other factors firms official liabilities detection firms negotiation power and red tape costs imposed on firms some of the predictions from the theoretical model are tested using firm level data from uganda we find that bribe and tax payments are inversely related thereby supporting the hypothesis of a negotiation taking place between firms and tax collectors in particular a 1 point increase in average bribe payments per employee is associated with a 7 point reduction in average amount of tax payments per employee results are robust to various instruments dealing with the endogenous relationship between bribes and taxes

the not so dark side of trust does trust increase the size of the shadow economy this paper reports a negative relationship between the size of the shadow economy and generalized trust in a sample of countries both developed and developing that relationship is robust to controlling for a large set of economic policy and institutional variables to changing the estimate of the shadow economy and the estimation period and to controlling for endogeneity it is independent from trust in institutions and from income inequality and is mainly present in the sample of developing countries those findings suggest that the tax compliance effect of trust dominates its role as a substitute for the formal legal system

who gains from non collusive corruption non collusive corruption i e corruption that imposes an additional burden on business activity is particularly widespread in low income countries we build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption we find that credit market imperfections by generating rents for the incumbent entrepreneurs create strong incentives for corrupt behavior by state officials however non collusive corruption not only redistributes income from non officials towards officials but also within the group of potential entrepreneurs if borrowing is limited bribes prevent poorer but talented individuals from starting a business but this is likely to benefit those who may enter anyway the cost of capital is lower and there is less competition on the goods markets

informality in the process of development and growth informality is a term used to describe the collection of firms workers and activities that operate outside the legal and regulatory systems it is widespread in the majority of developing countries in a typical developing economy the informal sector produces about 35 per cent of gdp and employs 70 per cent of the labour force this paper studies informality in the context of economic development by presenting a model and projections that link informality regulations migration and economic growth this analytical framework highlights the trade offs between formality and informality the relationship between the different types of informality and the connection between them and the forces of labour capital and productivity growth the paper models the behaviour of the informal sector based on the following fundamental asymmetry formal firms confront higher labour costs while informal firms face higher capital costs and lower productivity using mandated minimum wages as the policy induced distortion the model first studies the static allocation of formal and informal capital and labour in a modern economy second it opens the possibility of labour migration from a rudimentary economy with ample supply of labour e g rural areas or less advanced neighbouring countries third the model analyses the dynamic behaviour of the formal and informal sectors considering how they affect and are affected by economic growth and labour migration then the paper presents projections for the size of labour informality in the modern and rudimentary economies in the next two decades for a large group of countries representing all regions of the world the projections are based on the calibration and simulation of the model and serve to discuss its usefulness and limitations

taxing the informal economy the current state of knowledge and agendas for future research abstractthis paper reviews the literature on taxation of the informal economy taking stock of key debates and drawing attention to recent innovations conventionally the debate on whether to tax has frequently focused on the limited revenue potential high cost of collection and potentially adverse impact on small firms recent arguments have increasingly emphasised the more indirect benefits of informal taxation in relation to economic growth broader tax compliance and governance more research is needed we argue into the relevant costs and benefits for all including quasi voluntary compliance political and administrative incentives for reform and citizen state bargaining over taxation

the institutional foundations of inequality and growth abstract after a decade of research the effect of inequality on long run economic growth remains unresolved in part because researchers have treated omitted variable bias as an estimation problem rather than a deeper question of causality in this article we argue that the key omitted variable is the quality of economic institutions using both cross country and panel data specifications we find no direct effect of inequality on growth in the long run rather the protection of property rights simultaneously raises growth rates and reduces income inequality we interpret these findings as evidence that insecure property rights disproportionately disadvantage the poor

government in transition abstract the speed of economic reforms is not the only important determinant of the success of the transition to a market economy the transition of government from a communist state to an institution supporting a market economy is as critical survey evidence shows that russia lags significantly behind poland in the transition of its government which may account for its inferior economic performance despite adopting similar economic reforms i argue that the lack of turnover of old communist politicians and the creation of inappropriate electoral and fiscal incentives for these politicians may account for the poor performance of the russian government and suggest some strategies for improving the situation

why do entrepreneurs enter politics evidence from china this article examines the determinants of the entrepreneur s political participation by employing a unique matched firm institution data set from china we find that the likelihood of an entrepreneur s participation can be explained by the underdevelopment of markets and market supporting institutions according to our estimates the probability of entering politics decreases by 8 20 from the mean when the institutional indices improve by one standard deviation our findings support the view that the institutional environment shapes the private entrepreneur s motivation to participate in politics they also provide an example of how private entrepreneurs respond to state market failure in developing and transition countries jel g1 h00 o10 p2 p3