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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 04-2002:
Social norm, the informal sector and unemployment

Ann-Sofie Kolm and Birthe Larsen

Abstract: While examining the macroeconomic effects of increased government

control of the informal sector, this paper develops a two-sector general

equilibrium model featuring matching frictions on the labour market and

a social norm. Conducting informal work, or employing a worker infor-

mally, is associated with expected punishment fees and payments of a

moral cost, given that there is a social norm against tax evasion. This

framework facilitates an analysis of how wage setting, unemployment and

the size of the informal sector are affected by punishment policies, which

has been ignored in the previous literature. Furthermore, the inclusion of

an endogenously determined norm against tax evasion may explain differences in-between regions or countries in relative sizes of the formal and the informal sectors for similar tax- and punishment policies.

Keywords: Tax evasion; informal sector; matching; bargaining; unem- ployment.; (follow links to similar papers)

JEL-Codes: H26; J64; (follow links to similar papers)

24 pages, May 1, 2002

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