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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.

Suggested Citation

  • Hatipoglu, Ozan & Ozbek, Gulenay, 2008. "On the Political Economy of the Informal Sector and Income Redistribution," MPRA Paper 7857, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:7857
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    References listed on IDEAS

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    1. 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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    3. Macias, Jose Brambila & Cazzavillan, Guido, 2009. "The dynamics of parallel economies. Measuring the informal sector in Mexico," Research in Economics, Elsevier, vol. 63(3), pages 189-199, September.
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    Cited by:

    1. Eugenia Fotoniata & Thomas Moutos, 2013. "Product Quality, Informality, and Child Labor," Review of Development Economics, Wiley Blackwell, vol. 17(2), pages 268-283, May.
    2. Mohammad Javad Razmi & Arash Jamalmanesh, 2014. "How Political Indices Affect The Shadow Economy," Romanian Economic Business Review, Romanian-American University, vol. 9(1), pages 45-55, March.
    3. Ceyhun Elgin & Mario-Solis Garcia, 2012. "Public Trust, Taxes and the Informal Sector," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 26(1), pages 27-44.

    More about this item

    Keywords

    Informal Sector; Income Redistribution; Median Voter;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D3 - Microeconomics - - Distribution
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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