IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v95y2011i11p1280-1291.html
   My bibliography  Save this article

Optimal Policies with an Informal Sector

Author

Listed:
  • Cuff, Katherine
  • Marceau, Nicolas
  • Mongrain, Steeve
  • Roberts, Joanne

Abstract

This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. In equilibrium, domestic workers may work exclusively in the formal sector or also in the informal sector. Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented workers, even if they do not work in the same sectors of the economy. This is driven by the interaction of firm level decisions with optimal government policy. We also find that enforcement may not always be decreasing in its cost, and that governments will optimally enforce labour market segmentation if enforcement costs are not too high.

Suggested Citation

  • Cuff, Katherine & Marceau, Nicolas & Mongrain, Steeve & Roberts, Joanne, 2011. "Optimal Policies with an Informal Sector," Journal of Public Economics, Elsevier, vol. 95(11), pages 1280-1291.
    • Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1280-1291
    DOI: 10.1016/j.jpubeco.2010.10.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272710001532
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2010.10.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
    2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    3. Kopczuk, Wojciech, 2001. "Redistribution when avoidance behavior is heterogeneous," Journal of Public Economics, Elsevier, vol. 81(1), pages 51-71, July.
    4. Borjas, George J., 1999. "The economic analysis of immigration," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 28, pages 1697-1760, Elsevier.
    5. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
    6. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2016. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," Economica, London School of Economics and Political Science, vol. 83(330), pages 219-246, April.
    7. Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
    8. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 119-128, March.
    9. Gil S. Epstein & Odelia Heizler (Cohen), 2008. "Illegal migration, enforcement, and minimum wage," Research in Labor Economics, in: Work, Earnings and Other Aspects of the Employment Relation, pages 197-224, Emerald Group Publishing Limited.
    10. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
    11. George J. Borjas & Jeffrey Grogger & Gordon H. Hanson, 2008. "Imperfect Substitution between Immigrants and Natives: A Reappraisal," NBER Working Papers 13887, National Bureau of Economic Research, Inc.
    12. Ethier, Wilfred J, 1986. "Illegal Immigration," American Economic Review, American Economic Association, vol. 76(2), pages 258-262, May.
    13. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    14. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
    15. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    16. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    17. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
    18. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
    19. Katherine Cuff & Nicolas Marceau & Steeve Mongrain & Joanne Roberts, 2009. "Optimal Policies and the Informal Sector," Department of Economics Working Papers 2009-14, McMaster University.
    20. Slemrod, Joel, 1994. "Fixing the leak in Okun's bucket optimal tax progressivity when avoidance can be controlled," Journal of Public Economics, Elsevier, vol. 55(1), pages 41-51, September.
    21. Djajic, Slobodan, 1997. "Illegal Immigration and Resource Allocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 97-117, February.
    22. Ethier, Wilfred J, 1986. "Illegal Immigration: The Host-Country Problem," American Economic Review, American Economic Association, vol. 76(1), pages 56-71, March.
    23. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    24. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, number 9780521630351.
    25. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
    26. Bond, Eric W. & Chen, Tain-Jy, 1987. "The welfare effects of illegal immigration," Journal of International Economics, Elsevier, vol. 23(3-4), pages 315-328, November.
    27. repec:clg:wpaper:2009-12 is not listed on IDEAS
    28. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew Samuel & Jeremy Schwartz & Kerry Tan, 2021. "Licensing And The Informal Sector In Rental Housing Markets: Theory And Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 39(2), pages 325-347, April.
    2. Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2016. "Dual Corporate Tax Evasion," Discussion Papers dp16-12, Department of Economics, Simon Fraser University.
    3. Adam, Antonis & Kammas, Pantelis, 2012. "(Tax evasion) power to the people: does "early democratization" increase the size of the informal sector?," MPRA Paper 43343, University Library of Munich, Germany.
    4. Gkinni, Eleni & Vasilaki, Eleni, 2013. "Employment protection and income inequality: is there a role for the informal sector?," MPRA Paper 45464, University Library of Munich, Germany.
    5. Nakabayashi, Masaki, 2019. "From family security to the welfare state: Path dependency of social security on the difference in legal origins," Economic Modelling, Elsevier, vol. 82(C), pages 280-293.
    6. Marcelo Arbex & Enlinson Mattos & Laudo M. Ogura, 2015. "Welfare and Inequality with Hard-to-Tax Markets," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(3), pages 371-384, September.
    7. Iain W. Long & Vito Polito, 2017. "Job Search, Unemployment Protection and Informal Work in Advanced Economies," CESifo Working Paper Series 6763, CESifo.
    8. Hilson, Gavin, 2020. "The ‘Zambia Model’: A blueprint for formalizing artisanal and small-scale mining in sub-Saharan Africa?," Resources Policy, Elsevier, vol. 68(C).
    9. Andrew Samuel & Amy Farmer & Fabio Mendez, 2020. "Optimal regulation under imperfect enforcement: Permits, tickets, or both?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 420-441, September.
    10. Ceyhun Elgin & Ferda Erturk, 2019. "Informal economies around the world: measures, determinants and consequences," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 221-237, June.
    11. Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2017. "Shades of Grey: Business Compliance with Fiscal and Labour Regulations," Discussion Papers dp17-07, Department of Economics, Simon Fraser University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Katherine Cuff & Nicolas Marceau & Steeve Mongrain & Joanne Roberts, 2009. "Optimal Policies and the Informal Sector," Department of Economics Working Papers 2009-14, McMaster University.
    2. Todd Kumler & Eric Verhoogen & Judith Frías, 2020. "Enlisting Employees in Improving Payroll Tax Compliance: Evidence from Mexico," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 881-896, December.
    3. 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.
    4. Davidson, Carl & Martin, Lawrence & Wilson, John Douglas, 2007. "Efficient black markets?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1575-1590, August.
    5. repec:clg:wpaper:2009-12 is not listed on IDEAS
    6. Prado, Mauricio, 2011. "Government policy in the formal and informal sectors," European Economic Review, Elsevier, vol. 55(8), pages 1120-1136.
    7. Rubolino, Enrico, 2023. "Does weak enforcement deter tax progressivity?," Journal of Public Economics, Elsevier, vol. 219(C).
    8. Carrillo, Paul & Emran, M. Shahe, 2018. "Loss Aversion, Transaction Costs, or Audit Trigger? Learning about Corporate Tax Compliance from a Policy Experiment with Withholding Regime," MPRA Paper 87445, University Library of Munich, Germany.
    9. Bachas, Pierre & Gadenne, Lucie & Jensen, Anders, 2020. "Informality, Consumption Taxes and Redistribution," The Warwick Economics Research Paper Series (TWERPS) 1277, University of Warwick, Department of Economics.
    10. Strand, Jon, 2005. "Tax distortions, household production, and black-market work," European Journal of Political Economy, Elsevier, vol. 21(4), pages 851-871, December.
    11. El Badaoui, Eliane & Strobl, Eric & Walsh, Frank, 2010. "The formal sector wage premium and firm size," Journal of Development Economics, Elsevier, vol. 91(1), pages 37-47, January.
    12. Rainone, Edoardo, 2023. "Tax evasion policies and the demand for cash," Journal of Macroeconomics, Elsevier, vol. 76(C).
    13. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    14. Pappadá, Francesco & Zylberberg, Yanos, 2017. "Austerity and tax compliance," European Economic Review, Elsevier, vol. 100(C), pages 506-524.
    15. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan.
    16. Doligalski, Paweł & Rojas, Luis E., 2023. "Optimal redistribution with a shadow economy," Theoretical Economics, Econometric Society, vol. 18(2), May.
    17. Marcelo Arbex & Dennis O'Dea, 2011. "Informal work networks," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 247-272, February.
    18. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
    19. Nicoletta Batini & Young-Bae Kim & Paul Levine & Emanuela Lotti, 2009. "Informal Labour and Credit Markets: A Survey," School of Economics Discussion Papers 0609, School of Economics, University of Surrey.
    20. Arbex, Marcelo & Galvao, Antonio F. & Gomes, Fábio Augusto Reis, 2010. "Heterogeneity in the Returns to Education and Informal Activities," Insper Working Papers wpe_216, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    21. Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2017. "Shades of Grey: Business Compliance with Fiscal and Labour Regulations," Discussion Papers dp17-07, Department of Economics, Simon Fraser University.

    More about this item

    Keywords

    H32; H26; K42; Informal Labour Market; Enforcement; Undocumented Workers; Public Good Provision;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1280-1291. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.