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Optimal Policies with an Informal Sector

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Author Info

  • 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1280-1291

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1280-1291

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: H32; H26; K42; Informal Labour Market; Enforcement; Undocumented Workers; Public Good Provision;

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References

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  1. Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
  2. 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.
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  7. Kopczuk, Wojciech, 2001. "Redistribution when avoidance behavior is heterogeneous," Journal of Public Economics, Elsevier, vol. 81(1), pages 51-71, July.
  8. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  9. Joel Slemrod, 1998. "A General Model of the Behavioral Response to Taxation," NBER Working Papers 6582, National Bureau of Economic Research, Inc.
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  11. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, number 9780521630351, October.
  12. 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.
  13. 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.
  14. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
  15. Katherine Cuff & Nicolas Marceau & Steeve Mongrain & Joanne Roberts, 2009. "Optimal Policies and the Informal Sector," Department of Economics Working Papers 2009-14, McMaster University.
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  19. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc.
  20. 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.
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Cited by:
  1. 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.
  2. 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.

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