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Optimal Policies and the Informal Sector

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  • Katherine Cuff
  • Nicolas Marceau
  • Steeve Mongrain
  • Joanne Roberts

Abstract

This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. Equilibrium can be characterized as segmented or non-segmented, depending on whether domestic workers work exclusively in the formal sector (segmented) or also in the informal sector (non-segmented). 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 segmentation if enforcement costs are not too high.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2009-14.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2009-14.

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Length: 37 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:mcm:deptwp:2009-14

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

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References

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  1. Polinsky, A. Mitchell & Shavell, Steven, 2007. "The Theory of Public Enforcement of Law," Handbook of Law and Economics, Elsevier.
  2. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
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  7. 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.
  8. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  9. Freeman, Scott & Grogger, Jeffrey & Sonstelie, Jon, 1996. "The Spatial Concentration of Crime," Journal of Urban Economics, Elsevier, vol. 40(2), pages 216-231, September.
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  13. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  14. Louis Kaplow, 1989. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
  15. 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.
  16. Jacques, Jean-François & Fugazza, Marco, 2004. "Labor market institutions, taxation and the underground economy," Economics Papers from University Paris Dauphine 123456789/1888, Paris Dauphine University.
  17. 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.
  18. 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.
  19. Gil S. Epstein & Odelia Heizler, 2007. "Illegal Migration, Enforcement and Minimum Wage," CReAM Discussion Paper Series 0708, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  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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Citations

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Cited by:
  1. 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.
  2. Ogndal, Tone, 2012. "In the Shadow of the Labour Market," Memorandum 05/2012, Oslo University, Department of Economics.

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