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Informal sector, productivity, and tax collection

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  • Leal Ordóñez, Julio C.

Abstract

The informal sector is a prominent characteristic of many developing countries. Most of the literature has focused on understanding the determinants of informality. The connection between the informal sector and economic development is, nonetheless, relatively less understood. One of the most important determinants of informality is the tax enforcement quality of a country which, some authors argue, additionally distorts firms' decisions and creates inefficiency. In this paper, I assess the quantitative importance of the effects of incomplete tax enforcement on aggregate output and productivity. I use a dynamic general equilibrium framework to study effects that have received little attention in the literature. I calibrate the model using data for Mexico, an economy where 31% of the employees work in informal establishments. I then investigate the effects of improving enforcement. My main finding is that under complete enforcement, Mexico's labor productivity and output would be 17% higher.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26058.

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Date of creation: Feb 2010
Date of revision: Oct 2010
Handle: RePEc:pra:mprapa:26058

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Keywords: Informal Sector; Productivity; tax enforcement; TFP; Heterogeneous plants;

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  1. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," NBER Working Papers 14520, National Bureau of Economic Research, Inc.
  2. Hernan J Moscoso Boedo & Pablo N D’Erasmo, 2009. "Financial Structure, Informality and Development," Virginia Economics Online Papers 374, University of Virginia, Department of Economics.
  3. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1541-1553, October.
  4. Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers, Society for Economic Dynamics 69, Society for Economic Dynamics.
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  7. Diego Restuccia, 2011. "The Latin American Development Problem," Working Papers, University of Toronto, Department of Economics tecipa-432, University of Toronto, Department of Economics.
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  10. Jose Scheinkman & Aureo de Paula, 2007. "The Informal Sector," 2007 Meeting Papers, Society for Economic Dynamics 117, Society for Economic Dynamics.
  11. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, Elsevier, vol. 85(1-2), pages 1-27, February.
  12. Pedro S. Amaral & Erwan Quintin, 2010. "Limited Enforcement, Financial Intermediation, And Economic Development: A Quantitative Assessment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 785-811, 08.
  13. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  14. Loris Rubini, 2010. "Innovation and the Elasticity of Trade Volumes to Tariff Reductions," 2010 Meeting Papers, Society for Economic Dynamics 570, Society for Economic Dynamics.
  15. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
  16. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(2), pages 458-474, April.
  17. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
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