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On the Political Economy of the Informal Sector and Income Redistribution

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  • Hatipoglu, Ozan
  • Ozbek, Gulenay

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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7857.

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Date of creation: 20 Mar 2008
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Handle: RePEc:pra:mprapa:7857

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Keywords: Informal Sector; Income Redistribution; Median Voter;

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  1. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
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  7. Brambila Macias, Jose, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in México," MPRA Paper 8400, University Library of Munich, Germany.
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  17. 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.
  18. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  20. 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.
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Cited by:
  1. Ceyhun Elgin & Mario-Solis Garcia, 2011. "Public Trust, Taxes and the Informal Sector," Working Papers 2011/04, Bogazici University, Department of Economics.
  2. Eugenia Fotoniata & Thomas Moutos, 2013. "Product Quality, Informality, and Child Labor," Review of Development Economics, Wiley Blackwell, vol. 17(2), pages 268-283, 05.

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