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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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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. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Mazumdar, Dipak, 1976. "The urban informal sector," World Development, Elsevier, vol. 4(8), pages 655-679, August.
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  4. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
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  7. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  8. Macias, Jose Brambila & Cazzavillan, Guido, 2009. "The dynamics of parallel economies. Measuring the informal sector in Mexico," Research in Economics, Elsevier, vol. 63(3), pages 189-199, September.
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  14. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  15. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
  16. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  17. 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.
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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, 2012. "Public Trust, Taxes and the Informal Sector," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 26(1), pages 27-44.

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