A Theory of the Informal Sector

Azuma, Yoshiaki; Grossman, Herschel I.

doi:10.3386/w8823

Cited by 23 publications

(14 citation statements)

References 2 publications

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“…Unfortunately, the culture of informality leads to a vicious cycle of further tax avoidance and increased informality. Governments are forced to increase tax rates from the smaller (compliant) firms, which moves those firms toward noncompliance (e.g., Azuma and Grossman 2008, Dabla-Norris et al 2008, Marcouiller and Young 1995. By contrast, when the enforcement environment is excellent and there are auditing mechanisms to make tax avoidance more difficult, firms are less likely to be in the informal sector and less motivated to avoid transparency-enhancing technologies.…”

Section: Culture Of Informalitymentioning

confidence: 99%

The “Peter Pan Syndrome” in Emerging Markets: The Productivity-Transparency Trade-off in IT Adoption

Sudhir

Talukdar

2015

Marketing Science

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F irms invest in technology to increase productivity. Yet in emerging markets, where a culture of informality is widespread, information technology (IT) investments leading to greater transparency can impose a cost through higher taxes and the need for regulatory compliance. The tendency of firms to avoid productivityenhancing technologies and remain small to avoid transparency has been dubbed the "Peter Pan Syndrome." We examine whether firms make the trade-off between productivity and transparency by examining IT adoption in the Indian retail sector. We find that computer technology adoption is lower when firms are motivated to avoid transparency. Specifically, technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing. So, firms have a higher productivity gain threshold to adopt computers in corrupt business environments that suffer from patchy and variable enforcement of the tax laws. Not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption. Thus, in addition to their direct effects on the economy, enforcement, auditing, and corruption can have indirect effects through their negative impact on adoption of productivity-enhancing technologies that also increase operational transparency.

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Section: Culture Of Informalitymentioning

confidence: 99%

The “Peter Pan Syndrome” in Emerging Markets: The Productivity-Transparency Trade-off in IT Adoption

Sudhir

Talukdar

2015

Marketing Science

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“…6 This assumption is made for simplicity; nothing substantial changes when the fine is fixed at different rate. Azuma and Grossman (2002), whose focus is somewhat different, study government policy with regard to taxing the formal and the informal sectors.…”

Section: Description Of the Modelmentioning

confidence: 99%

“…Existing theories on informal sector almost invariably assume that formality imposes fiscal burden on a firm, such as taxes or costs of complying with regulatory requirements, as well as entails benefits of better access to productive public goods, see, e.g., Azuma and Grossman, 2002;Loayza, 1996;Marcouiller and Young, 1995. This tradeoff determines then the decisions of individual economic units whether or not to go informal, and ultimately, the relative size of the informal sector. The empirical literature relates the size of the informal sector to the tax burden (e.g., Cebula, 1997;Giles and Tedds, 2002), entry costs (Auriol and Warlters, 2005); institutional quality and regulatory burden, in particular, of labor (Friedman et al, 2000;Johnson et al, 1997Johnson et al, , 1998Johnson et al, , 2000Botero et al, 2004); and financial development (Straub, 2005).…”

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confidence: 99%

What causes firms to hide output? The determinants of informality

Dabla‐Norris

Gradstein

Inchauste

2008

Journal of Development Economics

304

178

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“…In many countries, especially poor countries, a heavy burden of taxes, bribes, and bureaucratic hassles drives many producers into the informal sector (Azuma and Grossman, 2002). For instance, establishing a business in the formal sector in SSA is a complex, lengthy and costly undertaking contributing to the reasons why enterprises remain informal (Verick, 2008).…”

Section: Literature Reviewmentioning

confidence: 99%

Financial crisis and informal sector women entrepreneurs in Mauritius

Kasseeah

Thoplan

Tandrayen‐Ragoobur

2014

IJEBR

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This paper examines whether women entrepreneurs operating in the informal sector in the small island economy of Mauritius have been affected by the global financial crisis, an area which is largely under-researched due to data limitations. Survey data of 158 women entrepreneurs operating in the informal sector in Mauritius is used to assess the impact of the financial crisis on their business activities. The principal component analysis is applied and our findings reveal that women entrepreneurs have been affected by the global financial crisis in two ways. The first is that they have been affected through revenue factors, which comprise the following: a fall in demand, a drop in revenue and a decrease in profits. The second way in which women entrepreneurs in the informal sector have been affected is through cost factors associated with a rise in the price of raw materials and a rise in other costs of production.

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A Theory of the Informal Sector

Cited by 23 publications

References 2 publications

The “Peter Pan Syndrome” in Emerging Markets: The Productivity-Transparency Trade-off in IT Adoption

The “Peter Pan Syndrome” in Emerging Markets: The Productivity-Transparency Trade-off in IT Adoption

What causes firms to hide output? The determinants of informality

Financial crisis and informal sector women entrepreneurs in Mauritius

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