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The impact of inequality on the informal economy in Latin America and Caribbean with a MIMIC model

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Listed:
  • Marcos Takanohashi

    (FGV)

  • Marcel Ribeiro

    (FGV)

  • Friedrich Schneider

    (Johannes Kepler University)

Abstract

Informality is a major issue in Latin America and the Caribbean (LAC). The literature estimating its size has been primarily limited to worldwide models applied to the region. This paper proposes a Multiple Indicators Multiple Causes (MIMIC) model using a data set composed of 41 countries in LAC. The model introduces income inequality and total factor productivity in addition to traditional variables. The results indicate that income inequality is a key determinant of IE, both in terms of statistical significance and measurement. Compared to a model using data from 188 countries, some causal variables have an impact ten times greater on the level of informality, highlighting the importance of tailor-made data set selection when modeling IE with MIMIC.

Suggested Citation

  • Marcos Takanohashi & Marcel Ribeiro & Friedrich Schneider, 2025. "The impact of inequality on the informal economy in Latin America and Caribbean with a MIMIC model," Empirical Economics, Springer, vol. 69(1), pages 181-211, July.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:1:d:10.1007_s00181-025-02729-w
    DOI: 10.1007/s00181-025-02729-w
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    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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