Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-25T23:56:47.290Z Has data issue: false hasContentIssue false
  • English
  • Français

INEQUALITY, INFORMALITY, AND CREDIT MARKET IMPERFECTIONS

Published online by Cambridge University Press:  23 June 2017

Roberto Dell'Anno
Roberto Dell'Anno*
Affiliation:
University of Salerno
*
Address correspondence to: Prof. Roberto Dell'Anno, Department of Economics and Statistics (DISES), CELPE, University of Salerno, Via Giovanni Paolo II, 132, 84084 Fisciano (Sa), Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a microfounded macroeconomic modeling framework to investigate the relationship between informality and the income distribution. We show that multiple equilibria may rise if credit markets are imperfect and that there is a nondivisible entry cost in the formal economy. The theoretical analysis demonstrates that in the steady state, low levels of inequality are negatively correlated with high informality; conversely, high inequality exacerbates informality. This finding supports the hypothesis of an optimal level of inequality that minimizes the informal economy relative to the impact of other levels of inequality. However, for ordinary income distributions, changes in the level of inequality have only a slight effect on the informality rate. We calibrate the model using data on the U.S. and Mexican economies to estimate the level of inequality that minimizes the informality rate. The self-employment rate emerges as the most relevant determinant of the informality rate.

Keywords

Informal EconomyIncome InequalityFormal Entry CostSelf-employment
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 5 , July 2018 , pp. 1184 - 1206
Copyright
Copyright © Cambridge University Press 2017 

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.)

Footnotes

I wish to thank Antonio Abatemarco, Desiree Teobaldelli, and two anonymous reviewers for providing insightful comments. Any remaining errors are mine alone.

References

REFERENCES

Acemoglu, D. (1995) Reward structure and the allocation of talent. European Economic Review 39, 17–33.Google Scholar
Acemoglu, D. and Verdier, T. (1998) Property rights, corruption, and the allocation of talent: A general equilibrium approach. Economic Journal 108, 1381–1403.Google Scholar
Ahmed, E., Rosser, J. B. Jr. and Rosser, M. V. (2007) Income inequality, corruption, and the non-observed economy: A global perspective. In Salzano, M. and Colander, D. (eds.), Complexity Hints for Economic Policy, pp. 233–252. Book Series New Economic Windows, Milan: Springer.CrossRefGoogle Scholar
Aitchison, J. and Brown, J. A. C. (1963) The Lognormal Distribution. New York: Cambridge University Press.Google Scholar
Alm, J. and Embaye, A. (2013) Using dynamic panel methods to estimate shadow economies around the world, 1990-2006. Public Finance Review 41 (5), 510–543.Google Scholar
Antunes, A. R. and Cavalcanti, T. V. de V. (2007) Start-up costs, limited enforcement, and the hidden economy. European Economic Review 51, 203–224.Google Scholar
Auriol, E. and Warlters, M. (2005) Taxation base in developing countries. Journal of Public Economics 89, 625–646.Google Scholar
Beck, T., Lin, C. and Ma, Y. (2014) Why do firms evade taxes? The role of information sharing and financial sector outreach. The Journal of Finance 69, 763–817.Google Scholar
Benabou, R. (1996) Heterogeneity, stratification, and growth: Macroeconomic implications of community structure and school finance. American Economic Review 86, 584–609.Google Scholar
Blackburn, K., Bose, N. and Capasso, S. (2012) Tax evasion, the underground economy and financial development. Journal of Economic Behavior and Organization 83, 243–253.Google Scholar
Bordignon, M. and Zanardi, A. (1997) Tax evasion in Italy. Giornale degli Economisti e Annali di Economia 56, 169–210.Google Scholar
Bruhn, M. (2011) License to sell: The effect of business registration reform on entrepreneurial activity in Mexico. Review of Economics and Statistics 93 (1), 382–386.Google Scholar
Buehn, A. and Schneider, F. (2012) Shadow economies around the world: novel insights, accepted knowledge, and new estimates. International Tax and Public Finance 19 (1), 139–171.Google Scholar
Capasso, S. and Jappelli, T. (2013) Financial development and the underground economy. Journal of Development Economics 101, 167–178.Google Scholar
Cassar, L. (2007) Convergence, Inequality and Education in the Galor and Zeira Model. Rivista di Politica Economica 97 (6), 229–254.Google Scholar
Chong, A. and Gradstein, M. (2007) Inequality and Informality. Journal of Public Economics, 9, 159–179.Google Scholar
D'Erasmo, P. N. and Boedo, H. J. M. (2012) Financial structure, informality and development. Journal of Monetary Economics 59, 286–302.Google Scholar
Dabla-Norris, E., Gradstein, M. and Inchauste, G. (2008) What causes firms to hide output? The determinants of informality. Journal of Development Economics 85, 1–27.Google Scholar
De Soto, H. (1989) The Other Path: The Economic Answer to Terrorism. New York: Harper and Row Publishers.Google Scholar
Dell'Anno, R. (2007) Shadow economy in Portugal: An analysis with the MIMIC approach. Journal of Applied Economics 10 (2), 253–277.CrossRefGoogle Scholar
Dell'Anno, R. (2016) Analyzing the determinants of the shadow economy with a “separate approach”. An application of the relationship between inequality and the shadow economy. World Development 84, 342–356.Google Scholar
Dell'Anno, R., Gòmez de Antonio, M. and Alanon Pardo, A. (2007) Shadow economy in three different mediterranean countries: France, Spain and Greece. A MIMIC Approach. Empirical Economics, 33 (1), 51–84.CrossRefGoogle Scholar
Dell'Anno, R. and Solomon, O.H. (2008) Shadow economy and unemployment rate in USA is there a structural relationship? An empirical analysis with structural equation model. Applied Economics 40 (19), 2537–2555.Google Scholar
Dessy, S. and Pallage, S. (2003) Taxes, inequality and the size of the informal sector. Journal of Development Economics 70 (1), 225–233.Google Scholar
Djankov, S. (2002) The regulation of entry. Quarterly Journal of Economics 117 (1), 1–37.Google Scholar
Djankov, S., Lieberman, I., Mukherjee, J., and Nenova, T. (2002) Going Informal: Benefits and Costs. Washington, DC: World Bank.Google Scholar
Eilat, Y. and Zinnes, C. (2002) The shadow economy in transition countries: Friend or foe? a policy perspective. World Development 30 (7), 1233–1254.Google Scholar
El-hadj, B. and Lei, F. (2014) Entry costs, financial frictions, and cross-country differences in income and TFP. Macroeconomic Dynamics, (doi:10.1017/S1365100514000649).Google Scholar
Gale, W. G. and Scholz, J. K. (1994) Intergenerational transfers and the accumulation of wealth. Journal of Economic Perspectives 8 (4), 145–160.CrossRefGoogle Scholar
Galor, O. (2011) Inequality, human capital formation, and the process of development (chapter 5). In Hanushek, E. A., Machin, S., and Woessmann, L. (eds.), Handbook of the Economics of Education, vol. 4, pp. 441–493. North Holland: Elsevier.Google Scholar
Galor, O. and Zeira, J. (1993) Income distribution and macroeconomics. Review of Economic Studies 60, 35–52.Google Scholar
Galor, O. and Moav, O. (2004) From physical capital to human capital accumulation: Inequality and the process of development. Review of Economic Studies 71, 1001–1026.Google Scholar
Galor, O., Moav, O. and Vollrath, D. (2009) Inequality in landownership, the emergence of human-capital promoting institutions, and the great divergence. Review of Economic Studies 76, 143–179.Google Scholar
Glomm, G. and Ravikumar, B. (1992) Public versus private investment in human capital: Endogenous growth and income inequality. Journal of Political Economy 100 (4), 818–834.Google Scholar
ILO (1993) Fifteenth International Conference of Labour Statisticians, Report of the Conference. ICLS/15/D.6 (Rev. 1). International Labour Office, Geneva, Switzerland: ILO.Google Scholar
ILO (2002) Women and Men in the Informal Economy: A Statistical Picture. Geneva, Switzerland: International Labour Organization.Google Scholar
ILO-WIEGO (2013) Women and Men in the Informal Economy 2013: A Statistical Picture, 2nd ed. Geneva, Switzerland: ILO.Google Scholar
Joydeep, B., Qiao, X. and Wang, M. (2016) Endogenous borrowing constraints and wealth inequality. Macroeconomic Dynamics, (doi:10.1017/S1365100514000959).Google Scholar
Kaplan, D. S., Piedra, E. and Seira, E. (2011) Entry regulation and business start-ups: Evidence from Mexico. Journal of Public Economics 95, 1501–1515.Google Scholar
Krstic, G. and Sanfey, P. (2011) Earnings inequality and the informal economy. Evidence from Serbia. Economics of Transition 19 (1), 179–199.Google Scholar
La Porta, R. and Shleifer, A. (2008) The unofficial economy and economic development. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 39 (2), 275–363.Google Scholar
Leino, J. (2009) Formal and Informal Microenterprises. Enterprise surveys note, 5. Informality. Washington, DC: World Bank.Google Scholar
Loayza, N. 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
Loayza, N. V. and Rigolini, J. (2011) Informal employment: Safety net or growth engine? World Development 39 (9), 1503–1515.Google Scholar
Maloney, W. F. (2004) Informality revisited. World Development 32 (7), 1159–1178.Google Scholar
McDonald, S. and Zhang, J. (2012) Income inequality and economic growth with altruistic bequests and human capital investment. Macroeconomic Dynamics 16, 331–354.Google Scholar
Rosser, J. B. Jr, Rosser, M. V. and Ehsan, A. (2000) Income inequality and the informal economy in transitions economies. Journal of Comparative Economics 28 (1), 156–171.Google Scholar
Rosser, J. B. Jr, Rosser, M. V. and Ehsan, A. (2003) Multiple unofficial economy equilibria and income distribution dynamics in systemic transition. Journal of Post Keynesian Economics 25 (3), 425–447.Google Scholar
Schneider, F. (2011) Handbook on the Shadow Economy. Cheltenham, UK: Edward Elgar Publishing.CrossRefGoogle Scholar
Schneider, F., Buehn, A. and Montenegro, C. E. (2010) New estimates for the shadow economies all over the world. International Economic Journal 24 (4), 443–461.Google Scholar
Straub, S. (2005) Informal sector: The credit market channel. Journal of Development Economics 78, 299–321.Google Scholar
Thomas, J. (1999) Quantifying the black economy: ‘Measurement without theory’ yet again?. Economic Journal 109 (456), 381–389.Google Scholar
Ulyssea, G. (2010) Regulation of entry, labor market institutions and the informal sector. Journal of Development Economics 91 (1), 87–99.Google Scholar
Valentini, E. (2009) Underground economy, evasion and inequality. International Economic Journal 23 (2), 281–290.Google Scholar
Zilcha, I. (2003) Intergenerational transfers, production and income distribution. Journal of Public Economics 87, 489–513.Google Scholar