Lurking in the Shadows : The informal sector and government policy

  title={Lurking in the Shadows : The informal sector and government policy},
  author={Jane Ihrig and Karine S. Moe},
This paper develops a dynamic model that sheds light on the evolution of the informal sector. We show how tax rates and enforcement policies in uence the size of this sector, as well as how the sector naturally shrinks as an economy transitions towards steady state. We nd that a reduction in the tax rate is the best policy for decreasing the size of the informal sector. This policy not only reduces informal employment, but also increases the standard of living. The distortion resulting from the… CONTINUE READING

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