Informal Markets, Domestic Production and Demand Elasticities: A Case Study for Turkey

In this article, the size of informal economy is measured using an estimation of demand system including both monetary incomes and incomes from domestic production based on cross-sectional data covering 2003–2006 period in Turkey. Combining these two sources of income allows the computation of proxies of full prices at the individual level. The estimation of this demand system including resources from domestic production increases significantly the evaluated size of informal economy by one third. The full price elasticities estimated with respect to these proxies can be decomposed into time and monetary components. Estimates of the elasticities with respect to monetary prices and time-costs are significantly negative for all types of expenditures, so that economic policies can be efficiently applied to a taxation of monetary values using the estimates of those elasticities over sub-populations rather than elasticities computed on macro-data. Time-cost elasticities are shown to be larger in absolute value than their monetary price counter-part while for income effects the time-ressource elasticities are lower in absolute value than the monetary income ones. These results are important for public policy concerning informal work, showing a large difference in the substitution effect between time and money among household participating or not participating in informal activities.