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On the political economy of the informal sector and income redistribution

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  • Ozan Hatipoglu

    ()

  • Gulenay Ozbek

Abstract

In this paper we analyze a general equilibrium model in which agents choose to be employed in formal or in the informal sector. The formal sector is taxed to provide income subsidies and the level of redistribution is determined endogenously through majority voting. We explore how the demand for redistribution determined by majority voting interacts with the incentive to work in the untaxed informal market. We also investigate how different levels of the informal sector wage can explain simultaneous changes in the size of the informal sector and level of redistribution. The model is simulated to produce qualitative results to illustrate the differences between economies with different distributional features. The model accounts for the different sizes of informal sector and income redistribution in Mexico and United States.

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File URL: http://hdl.handle.net/10.1007/s10657-010-9179-6
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Bibliographic Info

Article provided by Springer in its journal European Journal of Law and Economics.

Volume (Year): 32 (2011)
Issue (Month): 1 (August)
Pages: 69-87

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Handle: RePEc:kap:ejlwec:v:32:y:2011:i:1:p:69-87

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Web page: http://www.springerlink.com/link.asp?id=100264

Related research

Keywords: Informal sector; Income redistribution; Median voter; H2; D3; J2;

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References

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  1. Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2007. "The Monetary Method And The Size Of The Shadow Economy: A Critical Assessment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(2), pages 363-371, 06.
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  16. Dessy, Sylvain & Pallage, Stéphane, 2001. "Taxes, Inequality and the Size of the Informal Sector," Cahiers de recherche 0112, Université Laval - Département d'économique.
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Cited by:
  1. Eugenia Fotoniata & Thomas Moutos, 2011. "Product Quality, Informality, and Child Labour," CESifo Working Paper Series 3537, CESifo Group Munich.
  2. Ceyhun Elgin & Mario-Solis Garcia, 2011. "Public Trust, Taxes and the Informal Sector," Working Papers 2011/04, Bogazici University, Department of Economics.

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