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Informal Sector, Government Policy and Institutions

Author

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  • S. Boragan Aruoba

    (University of Maryland)

Abstract

We document cross-country differences in informal activity, government policies and institutions using a data set covering 127 countries. Five key facts emerge from this data set. Better institutions are associated with lower inflation, higher income tax rates and less informal activity. Related to these, we also find that higher levels of informal activity is associated with lower income tax rates and higher inflation. We develop a general equilibrium model where households optimally choose the extent of informal activity and the government optimally chooses policies, both taking as given the institutions of the economy. The model is able to account for most of the cross-country differences in policies, and other key facts that emerge from the data. The performance of the model is significantly reduced for various subsets of countries, where some of the key assumptions that underlie our model are violated.

Suggested Citation

  • S. Boragan Aruoba, 2010. "Informal Sector, Government Policy and Institutions," 2010 Meeting Papers 324, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:324
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    Citations

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    Cited by:

    1. A. P. Kireenko & E. N. Nevzorova, 2019. "Shadow Economy in the Countryside of Russian Regions," Regional Research of Russia, Springer, vol. 9(1), pages 66-77, January.
    2. Elgin, Ceyhun & Uras, Burak R., 2014. "Homeownership, informality and the transmission of monetary policy," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 160-168.
    3. Gomis-Porqueras, Pedro & Peralta-Alva, Adrian & Waller, Christopher, 2014. "The shadow economy as an equilibrium outcome," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 1-19.
    4. Corneliu Sorin BAICU & Cristian Valentin HAPENCIUC, 2016. "Model Of Choices, Institutions And Direct Democracy Quasi-Economic Factors Of The Influence Of Underground Economy," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 5(2), pages 1-30, July.
    5. Mitra, Shalini, 2017. "To tax or not to tax? When does it matter for informality?," Economic Modelling, Elsevier, vol. 64(C), pages 117-127.
    6. Yépez, Carlos A., 2019. "Informality and international business cycles," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 252-263.
    7. Cordelia Onyinyechi Omodero, 2020. "Taxation Income, Graft and Informal Sector Operations in Nigeria in Relation to Other African Countries," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(2), pages 163-172, April.
    8. Ceyhun Elgin & Mario-Solis Garcia, 2012. "Public Trust, Taxes and the Informal Sector," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 26(1), pages 27-44.
    9. Zoë Kuehn, 2014. "Tax Rates, Governance, And The Informal Economy In High-Income Countries," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 405-430, January.
    10. Ceyhun Elgin & Burak Uras, 2013. "Is informality a barrier to financial development?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 309-331, August.
    11. Mehak Majeed & Saeed Owais Mushtaq & Zahid Gulzar Rather, 2022. "The Complementarity Between the Formal and Informal Sub-sectors of the Indian Industry," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 65(4), pages 981-1006, December.
    12. Shami, Labib, 2019. "Dynamic monetary equilibrium with a Non-Observed Economy and Shapley and Shubik’s price mechanism," Journal of Macroeconomics, Elsevier, vol. 62(C).
    13. Gheorghe ZAMAN & Zizi GOSCHIN, 2016. "A New Multidimensional Ranking of Shadow Economy for EU Countries," Romanian Journal of Economics, Institute of National Economy, vol. 43(2(52)), pages 14-33, december.
    14. Anbarci, Nejat & Gomis-Porqueras, Pedro & Marcus, Pivato, 2012. "Formal and informal markets: A strategic and evolutionary perspective," MPRA Paper 42513, University Library of Munich, Germany.
    15. Nejat Anbarci & Pedro Gomis-Porqueras & Marcus Pivato, 2018. "Evolutionary stability of bargaining and price posting: implications for formal and informal activities," Journal of Evolutionary Economics, Springer, vol. 28(2), pages 365-397, April.
    16. Restrepo-Echavarria, Paulina, 2014. "Macroeconomic volatility: The role of the informal economy," European Economic Review, Elsevier, vol. 70(C), pages 454-469.
    17. Roychowdhury, Punarjit & Dutta, Mousumi, 2011. "Regulation, governance and informality: an empirical analysis of selected countries," MPRA Paper 33775, University Library of Munich, Germany.
    18. Mitra, Shalini, 2014. "Tax Evasion, Tax Policies and the Role Played by Financial Markets," MPRA Paper 58977, University Library of Munich, Germany.
    19. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    20. Omodero Cordelia Onyinyechi, 2019. "The Consequences of Shadow Economy and Corruption on Tax Revenue Performance in Nigeria," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 29(3), pages 64-79, September.
    21. Semih Tumen, 2016. "Informality as a stepping stone: A search-theoretical assessment of informal sector and government policy," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 16(3), pages 109-117.
    22. Narciz Balasoiu & Iulian Chifu & Marian Oancea, 2023. "Impact of Direct Taxation on Economic Growth: Empirical Evidence Based on Panel Data Regression Analysis at the Level of Eu Countries," Sustainability, MDPI, vol. 15(9), pages 1-32, April.
    23. Horvath, Jaroslav, 2018. "Business cycles, informal economy, and interest rates in emerging countries," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 96-116.

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