Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-11T07:22:48.007Z Has data issue: false hasContentIssue false
  • English
  • Français

INFORMAL ECONOMY IN A DYNAMIC POLITICAL FRAMEWORK

Published online by Cambridge University Press:  09 October 2013

Ceyhun Elgin
Ceyhun Elgin*
Affiliation:
Bogazici University
*
Address correspondence to: Ceyhun Elgin, Department of Economics, Bogazici University, Natuk Birkan Hall, Bebek 34342, Istanbul, Turkey; e-mail: ceyhun.elgin@boun.edu.tr.
Get access Rights & Permissions [Opens in a new window]

Abstract

I develop a dynamic political economy model with an informal sector and two political parties alternating in office. In equilibrium, if the incumbent political party faces a higher probability of staying in office, it sets a higher tax rate on the formal economy to invest more in productive public capital, while spending less for current office rent. Moreover, I argue that public capital is mainly utilized by the formal sector, and this implies that countries in which incumbent parties are more likely to stay in power have a higher tax burden but a smaller informal sector. I also present some empirical evidence that supports the main results of the model.

Keywords

Tax EvasionInformal SectorPolitical TurnoverMarkov Perfect Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 3 , April 2015 , pp. 578 - 617
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Amaral, Pedro and Quintin, Erwin (2006) A competitive model of the informal sector. Journal of Monetary Economics 53 (7), 1541–1553.Google Scholar
Anderson, Theodore and Hsiao, W. Cheng (1982) Formulation and estimation of dynamic models using panel data. Journal of Econometrics 18 (1), 47–82.Google Scholar
Arellano, Manuel and Bond, Stephen (1991) Some test of specification for panel data: Monte Carlo evidence and application to employment equations. Review of Economic Studies 58, 277–297.Google Scholar
Aruoba, Boragan S. (2010) Informal Sector, Government Policy and Institutions. Working paper, University of Virginia.Google Scholar
Aschauer, David A. (1989) Does public capital crowd out private capital? Journal of Monetary Economics, 24, 171–188.Google Scholar
Baier, Scott L. and Glomm, G. Gerhard (2001) Long-run growth and welfare effects of public policies with distortionary taxation. Journal of Economic Dynamics and Control 25, 2007–2042.Google Scholar
Barro, Robert J. and Martin, Xavier Sala-i (1992) Public finance in models of economic growth. Review of Economic Studies 59 (4), 645–661.Google Scholar
Brender, Adi and Drazen, Allan (2008) How do budget deficits and economic growth affect reelection prospects? Evidence from a large panel of countries. American Economic Review 98 (5), 2203–2220.Google Scholar
Busato, Francesco and Chiarini, Bruno (2004) Market and underground activities in a two-sector dynamic equilibrium model. Economic Theory 23, 831–861.Google Scholar
Cicek, Deniz and Elgin, Ceyhun (2011) Cyclicality of fiscal policy and the shadow economy. Empirical Economics 41 (3), 725–737.Google Scholar
Cohen, Daniel and Michel, Philippe (1988) How should control theory be used to calculate a time-consistent government policy? Review of Economic Studies 55, 263–274.Google Scholar
Currie, David A. and Levine, Paul L. (1993) Rules, Reputation and Macroeconomic Contracts. Cambridge, UK: Cambridge University Press.Google Scholar
Dreher, Axel and Schneider, Friedrich (2010) Corruption and the shadow economy: An empirical analysis. Public Choice 144, 215–238.Google Scholar
Eicher, Theo and Turnovsky, Stephen (2000) Scale, congestion and growth. Economica 67, 325–346.Google Scholar
Elgin, Ceyhun (2012) Cyclicality of shadow economy. Economic Papers: A Journal of Applied Economics and Policy 31, 478–490.Google Scholar
Fortin, B., Marceau, N., and Savard, L. (1997) Taxation, wage controls and the informal sector. Journal of Public Economics 66, 239–312.Google Scholar
Frey, Bruno S. and Pommerehne, W.W. (1984) The hidden economy: State and prospect for measurement. Review of Income and Wealth 30 (3), 1–23.Google Scholar
Friedman, E., Johnson, S., Kaufman, D., and Zoldo-Lobaton, P. (2000) Dodging the grabbing hand: The determinants of unofficial activity in 69 countries, Journal of Public Economics 76 (3), 459–493.Google Scholar
Hart, Keith (2008) Informal economy. In Durlauf, Steven N. and Blume, Lawrence E. (eds.), The New Palgrave Dictionary of Economics, 2nd ed., pp. 221–229. New York: Palgrave Macmillan.Google Scholar
Ihrig, Jane and Moe, Karine S. (2004) Lurking in the shadows: The informal sector and government policy. Journal of Development Economics 73 (2), 541–557.Google Scholar
Johnson, Simon, Kaufman, Daniel, and Shleifer, Andrei (1997) The unofficial economy in transition. Brookings Papers on Economic Activity, 159–221.Google Scholar
Johnson, Simon, Kaufman, Daniel, and Zoido-Lobaton, Pablo (1998) Regulatory discretion and the unofficial economy. American Economic Review 88, 387–392.Google Scholar
Klein, Paul, Krussel, Per, and Rios-Rull, J. Victor (2008) Time-consistent public policy. Review of Economic Studies 75 (3), 789–808.CrossRefGoogle Scholar
Klein, Paul and Rios-Rull, J. Victor (2003) Time consistent optimal fiscal policy. International Economic Review 44 (4), 1217–1246.CrossRefGoogle Scholar
Krusell, P., Quadrini, V., and Ríos-Rull, J.-V. (1996) Are consumption taxes really better than income taxes? Journal of Monetary Economics 37 (3), 475–504.Google Scholar
Krusell, Per and Smith, Anthony A. (2003) Consumption–savings decisions with quasigeometric discounting. Econometrica 71, 365–375.Google Scholar
Kucera, Davis and Xenogiani, Theodora (2009) Persisting informal employment: What explains it? In Jutting, Johannes and De Laiglesia, Juan (eds.), Is Informal Normal? Towards More and Better Jobs in Developing Countries, pp. 63–89. Paris: OECD Development Center.Google Scholar
Loayza, Norman V. (1996) The economics of the informal sector: A simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy 45, 129–162.Google Scholar
Martin, Fernando (2010) Markov-perfect capital and labor taxes. Journal of Economic Dynamics and Control 34 (3), 503–521.Google Scholar
Rauch, James. E. (1991) Modeling the informal sector formally. Journal of Development Economics 35, 33–48.CrossRefGoogle Scholar
Schneider, Friedrichm (2007) Shadow Economies and Corruption All over the World: New Estimates for 145 Countries. Working paper 5356, World Bank Policy Research.CrossRefGoogle Scholar
Schneider, Friedrich, Andreas Buehn, and Claudio E . Montenegro (2010) New estimates for the shadow economies all over the world. International Economic Journal 24 (4), 443–461.Google Scholar
Schneider, Friedrich and Enste, Dominik H. (2000) Shadow economies: Sizes, causes and consequences. Journal of Economic Perspectives 38, 77–114.Google Scholar
Tanzi, Vito (1999) Uses and abuses of estimates of the underground economy. Economic Journal 109, F338–347.Google Scholar
Thomas, James J. (1992) Informal Economic Activity. Ann Arbor: University of Michigan Press.Google Scholar
Torgler, Benno and Schneider, F. Friedrich (2007) Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis. IZA discussion paper 2563.CrossRefGoogle Scholar