Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75051
Authors: 
Feldina, Aljoša
Polanec, Sašo
Year of Publication: 
2012
Series/Report no.: 
LICOS Discussion Paper 324
Abstract: 
We propose a theory of firm that is consistent with empirically observed phenomenon of firms simultaneously engaging in both firmal and infirmal activities. firms face endogenous probability of auditing that depends on the scale of underreporting of both sales and wages. We characterize the conditions for a firm facing corporate, value added and payroll taxes to hide a part of its activities. Underreporting gives rise to employment levels above those expected for firms that report truthfully. We also show that an underreporting firm is less affected by the introduction of the minimum wage. It further decreases the level of reported sales to mitigate the adverse effect that the minimum wage causes and decreases optimal employment by relatively less than an honest firm. The latter hypotheses is tested empirically using a matched employer-employee data set for Slovenia during the period of several minimum wage hikes (2007-2010).
Subjects: 
informal economy
minimum wage
taxation
auditing
JEL: 
H26
J38
D21
Document Type: 
Working Paper

Files in This Item:
File
Size
697.7 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.