Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100108
Authors: 
Leal-Ordoñez, Julio C.
Year of Publication: 
2013
Series/Report no.: 
Working Papers, Banco de México 2013-22
Abstract: 
Some authors argue that informality is associated with distorted firm decisions and inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico and investigate the effects of introducing enforcement improvements. Under complete enforcement, labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of distortions induced by incomplete enforcement of taxes which affect the economy in three ways: by reducing the capital-labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments. I isolate the effects of pure factor misallocation, distorted occupational choices, capital accumulation, and complementarities.
Subjects: 
tax enforcement
TFP
the informal sector
JEL: 
E23
E26
O17
O40
Document Type: 
Working Paper
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