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The informal sector

Author: Áureo Nilo de Paula Neto; José Alexandre Scheinkman; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2007.
Series: Working paper series (National Bureau of Economic Research), no. 13486.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a  Read more...
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Additional Physical Format: Print version:
Neto, Áureo Nilo de Paula, 1975-
Informal sector.
Cambridge, Mass. : National Bureau of Economic Research, 2007
(OCoLC)180705829
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Áureo Nilo de Paula Neto; José Alexandre Scheinkman; National Bureau of Economic Research.
OCLC Number: 174040756
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2011. MiAaHDL
Description: 1 online resource (1 volume).
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), no. 13486.
Responsibility: Áureo de Paula, José A. Scheinkman.

Abstract:

This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a limitation on size. As a result informal firms are smaller and have a lower capital labor ratio. When education is an imperfect proxy for ability, we show that the interaction of the manager's education and formality has a positive correlation with firm size. These implications are supported by our empirical analysis. The second model highlights the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream sectors. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, this chain effect vanishes.

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