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Firm heterogeneity and the allocation of resources across firms play a key role in determining aggregate productivity. Entry barriers and misallocation can substantially impact productivity, as evidenced in recent work. This article provides a unifying theoretical framework and a review of this literature.

This paper estimates the extent of income underreporting by households with business income relative to households of wage earners in Estonia. The paper uses a modified version of the methodology pioneered by Pissarides and Weber (1989). The extent of income underreporting is estimated by comparing food Engel curves for households with and without business income. The baseline result is that the reported income of households with business income above 20% of total income must be multiplied by 2.6 in order to attain the same propensity of food consumption as households of wage earners. Households with business income above 0 but below 20% also underreport income, but to a lesser extent. The estimates are higher than those found for developed countries, but consistent with other studies of the shadow economy in transition countries. The analysis also shows that the presence of business income is a better indicator of income underreporting than a reported status of self-employment.

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.

In this paper, the effects of reducing tariffs are analysed through a Computable General Equilibrium (CGE) model of the DRC. The specific DRC Formal-Informal Model (DRCFIM) is a multi-sectoral computable general equilibrium model that captures the observed structure of the DRC’s formal and informal economies, as well as the numerous linkages or transmission channels connecting their various economic agents, such as investors, firms, traders, and the government. The parameters of the CGE equations are calibrated to observed data from a social accounting matrix (SAM). In particular, this study draws the attention of policy makers to a different employment outcome when tariff reduction is taken into consideration. Tariff reduction increases formal employment and output but hurts informal producers. It considerably increases the output and employment of the formal sector by raising import competition without providing further opportunities for the informal sector to access foreign export markets. Nonetheless, it induces productivity improvements when local producers survive import competition by seeking importing input-saving technologies and production practices. These findings highlight the importance of differentiating between the formal and informal sector impacts of the DRC’s socioeconomic policies.

Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.

We contribute to the debate on how to assess the size of the underground (or shadow) economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) a la Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of the value of cash transactions - the flow of cash withdrawn from bank accounts relative to total non‐cash payments - as the dependent variable in the money demand equation. This allows us to avoid unrealistic assumptions on the velocity of money and the absence of any irregular transaction in a given year, overcoming two severe critiques to the traditional CDA. Second, in place of the tax burden level, usually intended as the main motivation for non‐compliance, we include among the covariates two direct indicators of detected tax evasion. Finally, we control also for the role of illegal production considering crimes like drug dealing and prostitution, which - jointly with the shadow economy - contributes to the larger aggregate of the non‐observed economy and represents a significant component of total cash payments. We propose then an application of this “modified CDA” to a panel of 91 Italian provinces for the years 2005–08.

This article aims to confront Foucault’s (2001) concept of heterotopia (2001) – the physical location of an utopia – with a "new, "informal and non-institutionalized retail space for gleaning second hand items : the sidewalk during the time of bulky item collection.A qualitative survey conducted with 17 urban gleaners shows that this place may be indicative of some contemporary utopias. Drawing on six distinctive features that define an heterotopia, we show that the sidewalk 1) is both an heterotopia of crisis and deviation; 2) changed function over time in becoming now a place for provisioning; 3) is a juxtaposition of different places, places of transit and supply, but also of personal stories via those of objects and/or encounters; 4) is an heterochrony, i.e. a moment that suspends time and traditional practices; 5) is a closed space between the gleaner and the real and imagined gaze of the other; and finally 6) has a function of supply, but also of denounciation of the consumption system. The concept of heterotopia finally underscores the importance of space in the field of consumption, not only with places being the unit of the analysis, but also in the form of dialogics that these "counter-sites" maintain with more conventional forms., Cet article a pour objectif de confronter le concept d'hétérotopie de Foucault (2001) – lieu physique d'une utopie – à un « nouveau » lieu de distribution d'objets d’occasion, informel et non institutionnalisé comme tel : le trottoir lors des jours d'encombrants. Une enquête qualitative constituée de 17 entretiens auprès de glaneurs urbains d'objets montre que ce lieu peut être révélateur de certaines utopies contemporaines. En reprenant les six traits distinctifs d'une hétérotopie, nous montrons que le trottoir 1) est à la fois une hétérotopie de crise et de déviation; 2) a changé de fonction en étant désormais un lieu d’approvisionnement ; 3) est une juxtaposition de lieux, lieux de passage et d’approvisionnement, mais également d'histoires personnelles via celles des objets, voire de rencontres ; 4) est une hétérochronie, c'est à dire un moment qui suspend le temps et les pratiques traditionnelles ; 5) est un espace fermé entre le glaneur et le regard d'autrui réel et imaginé et 6) a une fonction d'approvisionnement mais aussi de dénonciation du système de consommation. Le concept d’hétérotopie souligne l'intérêt d'une meilleure prise en compte de l'espace dans le champ de la consommation, pas seulement en tant que lieu pris comme unité d'analyse, mais aussi sous la forme du dialogue que ces « contre-emplacements » entretiennent avec les formes conventionnelles qu’ils contestent.

This paper quantifies the link between the timing of state-level implementations of political reservations for women in India with the role of women in India's manufacturing sector. While overall employment of women in manufacturing does not increase after the reforms, there is significant evidence that more women-owned establishments were created in the unorganized/informal sector. These new establishments were concentrated in industries where women entrepreneurs have been traditionally active and the entry was mainly found among household-based establishments. The paper measures and discusses the extent to which this heightened entrepreneurship is due to channels like greater finance access or heightened inspiration for women entrepreneurs.

This paper demonstrates theoretically that a profit tax does not affect the distribution of the firm’s operations between the official and the underground economy. Or, if the firm was initially operating only officially, direct taxation of its business would not be a reason to go underground. Indirect taxation in the form of a sales tax does influence an already existing mix of official and underground activities, favoring the latter. And, it does constitute a reason to “go underground” for an otherwise fully official business. This is a thesis robust to market structure changes and to introducing tax evasion in the usual sense, provided the underground demand is inelastic. The tax authority can still collect the planned tax revenue through a combination of a cash-flow tax with indirect taxation, under only consumersurplus loss by the underground customer.

We consider a dual labor market with a frictional formal sector and a competitive informal sector. We show that the size of the informal sector is generally too large compared to the optimal allocation of the workers. It follows that our results give a rationale to informality-reducing policies. (C) 2012 Elsevier B.V. All rights reserved.

The informal economy is an obscure concept but it contains several economic transactions. It is a very difficult task to measure its size and dimensions, however economists have developed reliable methods to predict the size and impact of informal economy in a given country or economic region. Studies in Turkey and abroad indicate that informal economy in this country is considerably large and sprawling. Existence of informal economy is a significant problem in any country since it negatively affects the national economic system. So far, policies deployed to deal with the negative outcomes of informal economy in Turkey mainly focused on tax policies and wages. On the other hand, increased educational attainment and provision of contemporary educational programs should be considered as better means to reduce the size and negative impact of informal economy. However, before using education to solve problems related to informal economy, the educational system needs to be restructured along with other restructuring efforts in economy, politics and legal systems. Increased educational attainment should also contribute to resolution of such social problems as economic growth and unfair income distribution in the country.

Some authors argue that informality is associated with distorted firm decisions and inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico and investigate the effects of introducing enforcement improvements. Under complete enforcement, labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of distortions induced by incomplete enforcement of taxes which affect the economy in three ways: by reducing the capital-labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments. I isolate the effects of pure factor misallocation, distorted occupational choices, capital accumulation, and complementarities.

Dieser Beitrag hat zwei Ziele: Erstens werden die empirischen Ergebnisse über die Erlöse (Geldwäsche-Ströme) der transnationalen organisierten Kriminalität (TOK) weltweit sowie für einige OECD-Länder dargestellt sowie deren Größenordnung nach verschiedenen Verbrechensarten. Weiters werden die illegalen, grenzüberschreitenden Transaktionen (hauptsächlich Steuer- und Abgabenbetrug) gezeigt, welche mit 66 % bei weitem den größten Anteil an allen illegalen Transaktionen haben. Zweitens erfolgen einige Ausführungen über die Infiltration der TOK in die „offizielle“ oder legale Wirtschaft sowie das „Funktionieren“ des Hawala- Bankensystems. Eine Schlussfolgerung aus diesem Beitrag ist, dass eine detaillierte Analyse über die Finanzerlöse und deren Quellen unerlässlich ist, um die TOK erfolgreich zu bekämpfen.

In this note, three major areas of Buchanan’s research are briefly described: (1) The ideas of Knut Wicksell on Buchanan’s work, (2) constitutional economics and the veil of ignorance, and (3) the role of government and/or the power to tax. It is shown that these three areas had a major influence on the European public choice movement, for example, at the European constitutional group.

Este trabajo compara los principales enfoques conceptuales y empíricos sobre la informalidad laboral en Colombia. Estos enfoques generalmente se remiten a las discusiones conceptuales que se han desarrollado en América Latina, y aplican mediciones propias que discrepan en la unidad de análisis y en los criterios de identificación de la informalidad. Utilizando como fuente la Gran Encuesta Integrada de Hogares, se encuentra que la magnitud de la informalidad es diferente dependiendo del enfoque, teniendo un rango de 16 a 59%. Al comparar la metodología de medición de la informalidad laboral desde siete perspectivas, se encuentran diferencias en la magnitud de la informalidad, en su trayectoria reciente, en los individuos que se incluyen y en la influencia de algunos atributos socioeconómicos y ocupacionales sobre la probabilidad de ser trabajador informal. This paper compares the main conceptual and empirical approaches to labor informality in Colombia. These approaches generally take into account conceptual discussions developed in Latin America and present measures differing in the unit of analysis and informality identification criteria. Using data from the Large Integrated Household Survey, it is shown that the size of informality can be different depending on the methodological approach, with a rate ranging from 16 to 59%. When comparing seven methodological approaches to labor informality, disagreement is found regarding the magnitude of informality, its recent evolution, individuals included, and in the influence of socio-economic and occupational attributes on the probability of being an informal worker. Cet article établi des comparaisons entre les différentes approches conceptuelles et empiriques concernant l'étude de l'emploi informel en Colombie. Ces approches sont constituées par des discussions conceptuelles qui ont eu lieu en Amérique Latine, lesquelles proposent des différentes mesures pour l'emploi informel en établissant ainsi un désaccord sur analyse traditionnelle et sur l'identification des critères d'informalité. À partir de l'Enquête Intégrée des Ménages, nous montrons que l'ampleur de l'informalité dépend de l'approche théorique utilisée, dans un domaine qui va du 16% au 59%. En comparant la méthode de mesure de l'emploi informel dans sept approches différentes, nous trouvons des différences significatives dans l'ampleur de l'informalité, dans son évolution récente, chez les individus qui y sont considérés et dans l'influence de certains de leurs attributs socioéconomiques et professionnels sur la probabilité d'être travailleur informel.

Many studies have been conducted to analyze the effect of stricter Employment Protection Legislation (EPL). However, almost all of them has focused on an ex-post impact; leaving aside a second but equally important channel: expectations. This paper aims to analyze the role of expectations on peruvian formal and informal labor market; using news as our identification variable. We use the monthly number of news related to the approval of the General Labor Law (GLL), a proposal entailing future stronger labor rigidities, from January 2001 to May 2012. Using the Permanent Employment Survey (EPE), we find a negative relation between expectations towards a stricter labor market and both employment and average income. News mainly affect formal occupied EAP, arousing a substitution effect from formal to informal employment. We also discover that the effect of expectations differs in periods with higher versus lower GDP growth. Finally, we find some evidence supporting news having a cumulative effect: the larger the previous stock of news, the weaker the effect.

The determinants of aggregate income-tax-evasion behaviour as reflected in the size of the underground economy in the US are analysed. These factors include the federal personal income tax rate, the social security tax rate, the federal corporation income tax rate, the public's dissatisfaction with the government, IRS audit rates and IRS penalty assessments on detected unreported income. The results show that the size of the underground economy is an increasing function of federal personal income tax rate, the social security tax rate and the public's dissatisfaction with the government. However, the size is a decreasing function of IRS penalty payments on unpaid taxes. JEL Codes: H26, E26, PSL Quarterly Review, V. 51, N. 206 (1998)

As by product of economic growth, jobs are indeed transformational. In other words, efficiency increases as workers get better at what they do (as more productive jobs appear and less productive one disappear). In fact societies flourish as jobs bring together people from different ethnic and social backgrounds while providing alternatives to conflict. Unfortunately, in many African countries, unemployment rates are low and growth is seldom jobless. Regrettably, most of the poor work long hours and cannot make ends meet while the violation of basic human rights is not uncommon. Again, youth unemployment and unmet job expectations are alarming. Consequently, this paper provides a framework that cuts across sectors and shows that the best policy responses vary across African countries (depending on their levels of development, endowments, demography and institutions). Thus, at all stages of development, forcing economic production to spread evenly across areas is both elusive and expensive. Policy makers should therefore identify and execute strategies that balance development outcomes across areas by means of domestic integration instruments. However, in places where integration is hardest, the policy response should be comprehensively total: institutions that unite, infrastructure that connects, interventions that target, incentives that motivate as well as information and communication technologies that enables or drives.

In this work we study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mex- ico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a significant impact on the size of the informal sector. We find that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.

The purpose of this paper is to present an extended version of the IS/LM model, with illegal economy and money laundering in a closed economy, which allows an macroeconomic analysis of the effects of this presence on short-term equilibrium. Without disregarding the FATF´s money laundering typology, we propose to differentiate the money laundering activities by the degree of crime organization. Thus, in a closed economy, we suppose two money laundering channels, through consumption and investment, which are reflecting the reintegration of the illegal money by individual criminals and by the organized crime. It is shown that the multiplier effect of the illegal economic activities is always negative on formal GDP, while the effect on the interest rate depends on the structure of the considered economy.

This paper studies the link between credit conditions and formalization in Brazil, as both credit and the rate of formalization have notably increased in the last decade. A firm dynamics model with endogenous formal and informal sectors is developed to quanti- tatively evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in the cost of financial intermediation. The model predicts that the observed reduction in intermediation costs generates an increase in the credit-to-output ratio and in the share of formal workers, in line with the data. It is found that-by affecting the corporate interest rate, the allocation of capital and the entry and exit rates-the change in credit conditions has important effects on firm size distribution and aggregate productivity.

This paper seeks to examine the effect of employment protection on income inequality. By employing the employment protection data developed by Botero et al. (2004) as well as well established measures of economic inequality for a sample of 83 countries, our analysis suggests that increased employment protection is negatively associated with income inequality. This relationship remains highly robust across several different specifications and estimation methods. In addition, our analysis places the spotlight on the role of the informal economy and investigates how the presence of informal sector may affect the above mentioned relationship. Our results suggest that in the presence of a large unofficial economy the negative impact of employment protection on inequality is crucially mitigated and in some extreme cases may also be reversed.

The purpose of this pedagogical study is to provide a straightforward and easily understood framework that can be used to teach the economic behavior underlying income tax evasion. We begin with presenting a brief background that reflects the research that had been done, especially for the case of the United States, on income tax evasion. This brief section is meant to provide the student with some overall perspective on the issue. Once this literature overview is completed, the main section of this study provides a framework, based in cost-benefit analysis, to enable the student to easily understand factors underlying personal income tax evasion.

Immigration has been a significant part of US population growth over recent decades, with the number of ``foreign born to non-US nationals" rising from approximately 10 million in 1970 to nearly 40 million or 12.9% of the US total population in 2010. In this paper, using a VAR with sign restriction identification, we find that unexpected increases in the working population lead to temporary reductions in GDP per capita and consumption per capita as would be predicted by the standard neoclassical growth model. However they do not lead to increases in non-residential investment or short run decreases in real wages as would also be predicted. The paper shows how a neoclassical growth model with a CES production function where migrant labor and capital are complements to skilled domestic labor and substitutes to each other can produce responses closer to those in the VAR. The paper thus provide support for the microeconometric studies on the impacts of immigration which found that immigrant labor is complementary to, rather than a substitute for, most native labor.

Since the seminal work of Solow (1956), along with the accumulation of factors related to physical capital, human capital has become one of the main determinants of economic growth. In this perspective, education is on growth through several channels to know, for example, life expectancy, birth rates and enrollment highlighted in most econometric regressions. The debate on the contribution of education to economic growth, especially in developing countries, is permanent in the economic literature. In Tunisia, this debate is even more pronounced when considering the proportion of the budget allocated to education. Education as an engine of growth, can also analyze various forms since its impact on growth varies we have primary, secondary and higher education. This paper aims to answer three sets of questions including: Is education is the only determinant of growth in Tunisia? If not, what are the related factors that enhance or constrain the effects on growth? And economic factors which structural or do they dominate in this process? Finally, what is the direction of causality between the highest education and economic growth? To provide some answers to these research questions, this study's objective is to empirically test a hypothesis defined for this purpose. This is the concern of this article. For this purpose, this paper tries to give some possible reflections that help us to develop the analytical tool that may help us to improving the way towards the amplification of the analysis paradigm.

How do key macroeconomic variables of a small open economy with segmented labour markets behave in response to domestic and external shocks? In this paper we attempt to address this question by modeling the coexistence of a formal labour market with higher wage rates and search frictions, and an informal labour market with the opposite attributes in the standard multi-sector small open economy New Keynesian DSGE model. The model is calibrated for a typical Sub-Saharan African economy and the behaviour of key macroeconomic variables in response to domestic and external shocks is analysed. The results show that almost all the impulse response functions of our model are consistent with what theory predicts and what other empirical works show about the responses of low income countries to the shocks we consider. However, our results do not seem to corroborate the widely held wisdom that the existence of an informal sector plays a stabilizing role in the event of shocks.

Using a novel dataset on summer 2012 tax inspections by the Hellenic Ministry of Finance in tourist and high economic activity areas in 13 regions in Greece we found that the intensification of tax audits can induce tax compliance. This finding is very important at the current juncture for Greece as it shows that improvement in tax administration and tax enforcement mechanisms can deter tax evasion, increase tax revenues and contribute to the on-going fiscal consolidation effort.

The aim of this work is to arrive at a better understanding of the underlying reasons for the slow adoption of electronic payment instruments in Italy. Our findings indicate that a pivotal role in explaining Italy�s lag in abandoning cash is played by development factors, such as innovative capability and income per capita. Surprisingly, although the shadow economy is important, it is not decisive in explaining the limited use of electronic retail payment instruments.

Se estudia los efectos de cambios en el salario mínimo utilizando una base de datos que registra 7 cambios consecutivos de este indicador (entre 2002 y 2011). Se estima que 1 millón de trabajadores tienen ingresos en la vecindad del salario mínimo. Los efectos sobre el empleo son decrecientes en términos absolutos según tamaño de empresa: efecto moderado en grandes empresas y efectos mayores en empresas pequeñas. Finalmente, se sugiere que los cambios en el ingreso están correlacionados con los cambios en el salario mínimo, este resultado se sustenta en los movimientos de la distribución del ingreso ante cambios en el salario mínimo y según un modelo que captura los determinantes del ingreso. Los resultados son robustos a la alta rotación del mercado laboral peruano, es decir al considerar las transiciones empleo - empleo en los cálculos.

A través de datos experimentales obtenidos de microempresas en el Cercado de Lima, este estudio analiza la demanda de formalización, es decir, de obtener una licencia de funcionamiento. Los hallazgos del estudio son paradójicos: la mayoría de empresas reporta más desventajas que ventajas de ser informales pero cuando se les anima a obtener una licencia, solo una de cuatro empresas acepta el incentivo. Así, para algunas empresas la formalización puede ser no deseable a cualquier costo, lo que puede estar asociado a los costos recurrentes de la formalización, el bajo valor de los beneficios de la formalización que se percibe y las perspectivas de crecimiento limitado de estas empresas. Una implicación adicional es que el autoreporte sobre la disposición a formalizar o sobre las razones por que no formalizar son poco fiables.

Shadow economy affects all country around the world. European countries are affected by undeclared work, under-reporting and tax evasion. This phenomenon increases from West to East, the most affected being the Balkan area. The size of shadow economy is growing due to government actions, such as regulation and tax implementation. From a macroeconomic perspective, the economic cycle sustain the shadow economy levels. To combat this phenomenon it is necessary to adopt electronic payments, to reduce tax implementations and social contributions, to bring encouragement in cash deposits use and broaden credit cards.

We study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mexico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a signi cant impact on the size of the informal sector. We nd that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.

This paper analyses wage subsidies on lower-skilled formal workers in the Democratic Republic of Congo (DRC). A multi-sectoral empirically-calibrated general equilibrium model capturing the economy-wide transactions between the formal and informal sectors is used to analyse one policy simulation in the DRC. The short and long run simulation in which the government provides wage subsidy to lower-skilled workers indicates that the government is able to significantly improve the deficiencies of the formal and informal households’ real disposable incomes. There is a general increase across formal and informal sectors in real household disposable incomes due to wage subsidy. The simulation results show that subsidy allocation narrowed the income gap between high and low income households, and between formal and informal sectors as well. The result seems somewhat insightful for wage policy simulation as the wage subsidy that targets lower-skilled formal workers increases real GDP from the expenditure side by 1.19% and 3.19% in the short and long run, respectively, from the baseline economy.

The existing marketing, strategy and economics literature have little to offer by way of recommendations to promote entrepreneurship in the informal economy, except to advocate that multinationals, local firms, state and public agencies should work together to bring the informal economy into the fold of the formal economy. In contrast, this paper argues that the business sustainability of women entrepreneurs in the informal economy depends upon their engagements or business partnerships with other women (and men) and women-focussed intermediaries. More than formalization, women entrepreneurs need 'spaces' for dialogue with other women (and men) to learn and build business capabilities. Both the State and firms wanting to penetrate the informal economy can create such spaces through partnerships with NGOs and women-focussed organizations. While formalization of entrepreneurial activity is favourable under some circumstances, it can be detrimental under others - necessitating a case by case evaluation rather than a general rule. In order to ensure the business sustainability of women's ventures in the informal economy, any sort of formalization must occur through a gradual process accompanied by intermediaries. These results are formulated through the compilation and analysis of the existing literature and the study of six detailed case studies of women entrepreneurs from developing countries validated by extensive interviews. The results are then used to propose a closed model of linkages between formal and informal economies which has novel organizational implications for firms competing to establish consumer bases and business partnerships in the Base of Pyramid (BoP) markets of developing countries.

This paper presents the various methods to estimate the size of the shadow economy, their strengths and weaknesses. The purpose of the paper is twofold. Firstly, it demonstrates that no ideal method to estimate the size and development of the shadow economy exists. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy as well as on a comparison of the size of the shadow economy using different estimation methods.

Achieving the long-term economic growth rate and development is the aspiration of all economic policy makers. Contemporary economic theory recognizes institutions as fundamental sources of economic prosperity. According to Douglas North (1991), institutions represent designed limitations that manage political, economic and social interactions. Precisely, institutions are the rules of behavior in a society, or more formally speaking, the restrictions on which man has fi gured out how to shape human interaction (North, 2003:13). Besides formal institutions, i.e. constitutions, laws, property rights, informal institutions encompass customs, traditions and codes of conduct. Although more attention in developed economies is devoted to formal institutions, many authors deal with informal institutions as objects of their research. The purpose of this paper is to present institutions through the function of economic growth and development. Besides, the purpose is also to consider the relationship between formal and informal institutions. Informal institutions are thoroughly presented through a series of examples which defi ne and analyze their impact on development outcomes.

The recent and growing literature which has extended the use of search and matching models even to the housing market does not use the free entry or zero-profit assumption as a key condition for solving the equilibrium of the model. This is because a straightforward adaptation of the basic matching model to the housing market seems impossible. However, this short paper shows that the zero-profit condition can be easily reformulated to take the distinctive features of the housing market into account. Indeed, the zero-profit condition considers the possibility that a buyer can become a seller and vice versa, since it is used to find the equilibrium of the model where the transition process from seller (buyer) to buyer (seller) comes to an end.

We investigate the coexistence of formal and informal markets. In formal markets, we assume sellers can publicly advertise their prices and locations, whereas in informal markets, sellers need to trade through bilateral bargaining so as to remain anonymous from the taxing authority. We consider two models. As a benchmark, we first only allow sellers to switch between markets, which enables us to derive some analytical results that show the existence of a stable equilibrium where formal and informal markets coexist. We also establish that some sellers will migrate from the formal market to the informal market if the formal market's advantage in quality assurance erodes, or the government imposes higher taxes and regulations in the formal market, or the risk of crime and/or confiscation decreases in the informal market, or the number of buyers in the informal market increases. Some sellers will migrate from the informal market to the formal market whenever the opposite changes occur. We then allow both sellers and buyers to switch between markets. In this model, we illustrate that if the net costs of trading for sellers in the formal sector and buyers in the informal sector have opposite signs, then there is a unique locally stable equilibrium where formal and informal markets coexist.

Modelling the sources of Business Cycle Fluctuations (BCF)1 in an open economy Dynamic Stochastic General Equilibrium (DSGE) framework is a fascinating area of research. The main advantage of this framework over traditional modelling approach is due to an additional feature of micro-foundations in terms of welfare optimisation. This feature allows structural interpretation of deep parameters in a way that is less skeptical to Lucas critique [Lucas (1976)]. In DSGE modelling context, the sources of BCF are normally viewed as exogenous shocks, which have potential power to propagate the key endogenous variables within the system. This requires a careful identification, as the transmission of these shocks may emanate from internal side, such as, political instability; weak institutional quality in terms of low governance, or from external side, such as, natural disaster (like, earth quacks and floods); international oil and commodity prices; sudden stops in foreign capital inflows; changes in term of trade and exchange rate, or any combination of shocks from both sides. Also, the nature and magnitude of these shocks may vary, depending upon their variances and persistence levels.

We use a dynamic stochastic general equilibrium search and matching model with salaried employment and informal self-employment to analyze the implications of introducing universal unemployment protection for informal workers through transfers, which are conditional on participation in training programs. We study how changes in unemployment benefits (UB) for unemployed workers in training programs (training UB), modify labor market outcomes for the unemployed. The model suggests that increasing training UB reduces unprotected unemployment and improves labor market outcomes through higher formal salaried employment and lower informal self-employment. Allowing for idiosyncratic quality in these training programs is key for these results. Higher training UB can also reduce total informal employment through a drastic reduction in the share of informal self-employment, without necessarily causing a large increase in total unemployment. Finally, the model suggests that increasing training UB may increase the volatility of unprotected unemployment. The influence of training programs on formal wage-setting is crucial to explain these results.

It is often argued that informal labour markets in developing countries are the engine of growth because their existence allows firms to operate in an environment where wage and regulatory costs are lower. On the other hand informality means that the amount of social protection offered to workers is lower. In this paper we extend the wage-posting framework of Burdett and Mortensen (1998) to allow for two sectors of employment. Firms are heterogeneous and decide endogenously in which sector to locate. Workers engage in both off the job and on the job search and decide which offers to accept. Direct transitions across sectors are permitted, which matches the evidence in the data about job mobility. Our empirical analysis uses Brazilian labour force surveys. We use the model to discuss the relative merits of alternative policies towards informality. In particular, we evaluate the impact of a tighter regulatory framework on employment in the formal and the informal sector on the distribution of wages.

This paper explores the links between labor formality, access to credit and firm performance in Colombia using Annual Manufacturing Survey data for the period 2000-2009. A significant though small relationship is found between access to credit and informality. The results suggest that a 10 percent increase in the ratio of credit to sectoral output increases labor formality between 0. 76 and 1. 14 percentage points. This effect vanishes as a firm’s financial constraint increases. The paper also reports a strong correlation between labor formality and firm performance measured as output and employment growth. A one percentage point increase in labor formality is associated with an 8. 5 percent increase in output and an 11 percent increase in employment growth.

The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad. We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions. We conclude that the large estimates of currency abroad obtained by these methods are spurious. The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S.

The paper presents estimations of the informal economy size in Bolivia from an application of a Dynamic General Equilibrium Model. The parameter estimation is performed using maximum likelihood method to obtain, as an intermediate result, a latent variable estimation of the informal economy size. This procedure is new, as the estimate of the size of the informal economy using a dynamic structural model represents an alternative study area to latent variable models which assume relationships without a strong support in theory (MIMIC models). The results suggest that the size of the informal economy represents 60% of Bolivian GDP in 2010 and that the trend has been decreasing in the last decade. In addition, we simulated four alternative policies to reduce the size of the underground economy. Some of them allow to identify surprising response mechanisms which allows to analyze the flow of workers from the informal sector into the formal sector and vice versa. The research, besides quantifying the informal economy size, tries to provide a tool and methodology for evaluating alternative policy scenarios related to fiscal policy and labor mobility in a framework of an economy with a large informal sector and evasion.

This paper examines the link between financial deepening and formalization in Peru. Using data from the National Household Survey, Bloomberg and the Central Bank of Peru Central Bank, the Cata~o, Page´s, and Rosales (2009) model is implemented at activity level (2-digits ISIC), and the Rajan and Zingales (1998) approach of sectors’ dependence on external funds is followed. The sample is divided into three firm size categories, and two formality measures are assessed. Using the accounting books specification, robust results are obtained, supporting a significant and positive effect of credit growth on formalization only for the self-employment firms category. Alternatively, using the pension enrollment specification, the channel is found positively significant only for firms with more than 10 workers; there is a smaller effect for firms with 2-10 workers. There is also a significant between effect, explaining the transition from small firms to larger firms due to greater credit availability.

The Islamic Republic of Iran as one of the widest countries of Middle East and economic poles of southeast of Asia is neighbor of 7 foreign countries in grand. An important negative result of this fact is smuggling in border cities of Iran that is named undergrand or informal economy. In the east of Iran, this phenomenon is in figure of smugging of economic goods with negative marginal utility which are called good commodities in economics that in addition to negative economic aspects has a variety of social disorders. In the west of country illegal import of commodities from neighbourhood countries is followed several negative economic results. The purpose of this article is to survey effective factors and results of smuggling extension in Iran.

This paper examines the effect of bank credit on employment formalization in Uruguay. Using a difference-in-differences methodology proposed by Catao, Pages and Rosales (2011), the paper finds that financial deepening decreases informality, especially in more financially dependent sectors. The effect is additionally found to be greater for women and younger workers. Despite the severe economic crisis and a sharp contraction of bank credit experienced by the economy in the period of analysis, no evidence is found that the effect of bank credit on employment formality has changed over time.

Este documento ofrece un análisis de los incentivos de los pequeños negocios para incluirse y permanecer en el Régimen Impositivo Simplificado Ecuatoriano (RISE) a través del pago cumplido de sus cuotas. Con información de los contribuyentes que se han acogido a este régimen durante los dos primeros años de su vigencia, se efectúa un análisis de los factores que más influyen en el pago a tiempo de las cuotas, utilizando un modelo de regresión logística. Los resultados sugieren que, a pesar de los esfuerzos de la Administración Tributaria, los pequeños contribuyentes no logran incorporar las ventajas de pertenecer al RISE.

We develop a theory of total factor productivity to understand differences in pro- ductivity and human capital across countries. In our model, firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by low allocative efficiency and a larger informal sector, lower measured TFP, and lower stocks of skilled workers. We find that this mechanism plays an important role in generating the differences observed between the US and de- veloping countries in the human capital stock. Moreover, formal sector entry costs and financial frictions are complementary and their joint effect is the main driver of the dif- ferences between the US and developing countries in terms of human capital, informality, and TFP. The complementarity effect is generated by the introduction of skilled workers, which increases the labor substitution incentives, which in turn moves the firm closer to the financial constraint.

A real, almost palpable, connection exists between the official and the underground economy. More than that, both sides of the economy (official and underground) are connected with the competitiveness of a country. Strangely a large presence of undereground in the economy is a sign of competitiveness. Although we would be tempted to say that underground is bad for competitiveness the reality is that due to taxes and regulations the resources (especially the human ones) used ”illegaly” would probably be wasted. In the end the wages from the underground economy return to the oficial one suporting it and hence the competitiveness of the country.