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The Impact of Inequality on the Informal Economy in Latin America and the Caribbean with a MIMIC Model

Author

Listed:
  • Marcos Takanohashi
  • Marcel Ribeiro
  • Friedrich Schneider

Abstract

Vast literature is available covering main Informal Economy (IE) causes and consequences for Latin America and Caribbean (LAC), but its size estimation has been mainly limited to worldwide models applied to the region. This paper proposes a MIMIC Base Model using a data set composed by 41 countries in LAC, in which both inequality and total factor productivity are introduced on top of traditional variables. Modelling results on IE estimates for LAC countries that are at par with the literature. When compared with a model using data from 188 countries, inequality has an impact ten-fold higher in the level of informality. Results suggest the importance of tailored data set selection when modelling IE with MIMIC.

Suggested Citation

  • Marcos Takanohashi & Marcel Ribeiro & Friedrich Schneider, 2023. "The Impact of Inequality on the Informal Economy in Latin America and the Caribbean with a MIMIC Model," CESifo Working Paper Series 10461, CESifo.
    • Handle: RePEc:ces:ceswps:_10461
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    References listed on IDEAS

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    1. Renzo Orsi & Davide Raggi & Francesco Turino, 2014. "Size, Trend, and Policy Implications of the Underground Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 417-436, July.
    2. Renzo Orsi & Davide Raggi & Francesco Turino, 2014. "Size, Trend, and Policy Implications of the Underground Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 417-436, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Informal Economy (IE). MIMIC (Multiple Indicators Multiple Causes); shadow economy; underground economy; non-observed economy; inequality; informality; tax burden; quality of state institutions; regulations; governance; GINI coefficient; TFP; Latin America and Caribbean (LAC);
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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