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Pollution and informal economy

Listed author(s):
  • Elgin, Ceyhun
  • Oztunali, Oguz

In this study, we investigate the relationship between the size of the informal economy and the level of environmental pollution/energy use. To this end, we first use different indicators of environmental pollution along with a measure of energy use intensity in a panel dataset consisting of 152 countries over the period 1999–2009 and empirically examine the relationship between pollution and the shadow economy. The estimation results show that there is an inverse-U relationship between the size of the informal economy and environmental pollution, that is, small and large sizes of the informal economy are associated with lower environmental pollution and medium levels of informality are associated with higher levels of environmental pollution. Next, we build a two sector dynamic general equilibrium model to suggest an economic mechanism for this observation. Our model identifies two channels through which informality might affect environmental pollution: The scale effect, whereby a larger (smaller) informal economy size is associated with a lower (higher) level of environmental pollution, and the deregulation effect, whereby a larger (smaller) informal economy is associated with higher (lower) pollution levels. As these two effects work in opposite directions, the changing relative strength of one with respect to the informal sector size creates the inverted-U relationship between pollution indicators and informality.

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File URL: http://www.sciencedirect.com/science/article/pii/S0939362514000521
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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 38 (2014)
Issue (Month): 3 ()
Pages: 333-349

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Handle: RePEc:eee:ecosys:v:38:y:2014:i:3:p:333-349
DOI: 10.1016/j.ecosys.2013.11.002
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  1. Sudeshna Chattopadhyay & Sarmila Banerjee & Katrin Millock, 2010. "Pollution control instruments in the presence of an informal sector," Documents de travail du Centre d'Economie de la Sorbonne 10103, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Andreas Buehn & Friedrich Schneider, 2012. "Shadow economies around the world: novel insights, accepted knowledge, and new estimates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 139-171, February.
  3. Holtz-Eakin, Douglas & Selden, Thomas M., 1995. "Stoking the fires? CO2 emissions and economic growth," Journal of Public Economics, Elsevier, vol. 57(1), pages 85-101, May.
  4. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
  5. Blackman, Allen & Bannister, Geoffrey, 1998. "Pollution Control in the Informal Sector: The Ciudad Juárez Brickmakers' Project," Discussion Papers dp-98-15, Resources For the Future.
  6. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages 338-347, June.
  7. Stokey, Nancy L, 1998. "Are There Limits to Growth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 1-31, February.
  8. Blackman, Allen & Shih, Jhih-Shyang & Evans, David & Batz, Michael & Newbold, Stephen & Cook, Joseph, 2006. "The benefits and costs of informal sector pollution control: Mexican brick kilns," Environment and Development Economics, Cambridge University Press, vol. 11(05), pages 603-627, October.
  9. Blackman, Allen & Bannister, Geoffrey J., 1998. "Community Pressure and Clean Technology in the Informal Sector: An Econometric Analysis of the Adoption of Propane by Traditional Mexican Brickmakers," Journal of Environmental Economics and Management, Elsevier, vol. 35(1), pages 1-21, January.
  10. Soham Baksi & Pinaki Bose, 2010. "Environmental Regulation in the Presence of an Informal Sector," Departmental Working Papers 2010-03, The University of Winnipeg, Department of Economics.
  11. 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.
  12. Ceyhun Elgin & Oğuz Öztunalı, 2014. "Environmental Kuznets Curve for the Informal Sector of Turkey (1950-2009)," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(4), pages 471-485, September.
  13. Ceyhun Elgin, 2010. "Political Turnover, Taxes and the Shadow Economy," Working Papers 2010/08, Bogazici University, Department of Economics.
  14. Sarbajit Chaudhuri, 2005. "Pollution And Welfare In The Presence Of Informal Sector: Is There Any Trade-Off?," Others 0510012, EconWPA.
  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. Ceyhun Elgin & Oguz Oztunali, 2012. "Shadow Economies around the World: Model Based Estimates," Working Papers 2012/05, Bogazici University, Department of Economics.
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