Government Policy in the Formal and Informal Sectors

Mauricio Prado

doi:10.1016/j.euroecorev.2011.04.010

Government Policy in the Formal and Informal Sectors

Mauricio Prado

Økonomisk Institut

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › peer review

Resumé

The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz's (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc.) to back out how high the enforcement levels must be country by country to make the theory match the data. The welfare gains from policy reforms are on average 1.2% (measured in terms of consumption) for OECD countries. I also find that the welfare gains from reducing regulation are on average 2.1%. Finally, performing a similar decomposition to that of Hall and Jones (1999), I find that distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.

Originalsprog	Engelsk
Tidsskrift	European Economic Review
Vol/bind	55
Udgave nummer	8
Sider (fra-til)	1120-1136
ISSN	0014-2921
DOI	https://doi.org/10.1016/j.euroecorev.2011.04.010
Status	Udgivet - 2011

Citer dette

Prado, M. (2011). Government Policy in the Formal and Informal Sectors. European Economic Review, 55(8), 1120-1136. https://doi.org/10.1016/j.euroecorev.2011.04.010

Prado, Mauricio. / Government Policy in the Formal and Informal Sectors. I: European Economic Review. 2011 ; Bind 55, Nr. 8. s. 1120-1136.

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Prado, M 2011, 'Government Policy in the Formal and Informal Sectors', European Economic Review, bind 55, nr. 8, s. 1120-1136. https://doi.org/10.1016/j.euroecorev.2011.04.010

Government Policy in the Formal and Informal Sectors. / Prado, Mauricio.

I: European Economic Review, Bind 55, Nr. 8, 2011, s. 1120-1136.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › peer review

TY - JOUR

T1 - Government Policy in the Formal and Informal Sectors

AU - Prado, Mauricio

PY - 2011

Y1 - 2011

N2 - The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz's (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc.) to back out how high the enforcement levels must be country by country to make the theory match the data. The welfare gains from policy reforms are on average 1.2% (measured in terms of consumption) for OECD countries. I also find that the welfare gains from reducing regulation are on average 2.1%. Finally, performing a similar decomposition to that of Hall and Jones (1999), I find that distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.

AB - The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz's (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc.) to back out how high the enforcement levels must be country by country to make the theory match the data. The welfare gains from policy reforms are on average 1.2% (measured in terms of consumption) for OECD countries. I also find that the welfare gains from reducing regulation are on average 2.1%. Finally, performing a similar decomposition to that of Hall and Jones (1999), I find that distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.

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KW - Regulation

KW - Enforcement

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KW - Government Policy

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DO - 10.1016/j.euroecorev.2011.04.010

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EP - 1136

JO - European Economic Review