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Formal sector enforcement and welfare

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  • Gareth Liu-Evans
  • Shalini Mitra

Abstract

Tax enforcement consistently lowers informality in the literature whereas the evidence is mixed for other factors affecting informality. Using several different samples of countries corresponding to different development levels, we find Rule of Law, the proxy for tax enforcement, to have a significant and robust effect on informality according to the continuous treatment test due to Belloni et al. (2014), which allows for uncertainty in the set of control variables via the use of a heteroscedasticity-robust Lasso method. A general equilibrium framework with heterogeneous firms and financial frictions further shows enforcement is welfarereducing for low to moderate costs of enforcement.

Suggested Citation

  • Gareth Liu-Evans & Shalini Mitra, 2020. "Formal sector enforcement and welfare," Working Papers 202030, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:202030
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    References listed on IDEAS

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    More about this item

    Keywords

    Lasso; Informal sector; welfare; tax enforcement; borrowing constraints; tax evasion;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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