A model of the Informal Economy in Transition Economies

Simon Commander and Andrei Tolstopiatenko

No 122, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: The informal economy has burgeoned in many transition economies but particularly in those of the Former Soviet Union. While this variation has commonly been related to the prevalent tax regimes and the degree of transparency in the legal and commercial system, the causality is far from obvious and other factors -- such as the importance of non-monetary compensation or social benefits -- seem to be important. This paper sets up a model of a formal and informal sector where multiple job-holding is feasible. The informal sector can choose to employ part time labour or full time workers; the latter will be subject to payroll taxation. The informal sector in this model makes its decisions contingent on the behavior of the formal sector and parameters, such as tax rates and the probability of being caught evading taxes. The model allows us to retrieve the ratio of the types of employment in each sector and their associated levels. With the closed form, a set of simulations are run that indicate the effect of shocks to demand and/or financing of social benefits on labour allocation. The distribution of employment across full and part time employment is very sensitive to the scale of subsidy given to benefits, as well as the tax regime and incidence.

JEL-codes: J23 J32 O11 P31 (search for similar items in EconPapers)
Pages: pages
Date: 1997-11-01
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp122.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp122.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp122.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:1997-122

Access Statistics for this paper

More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().