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The determinants of informal sector and their effects on the economy : The case of Korea

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Frame of Image n, Geun Young Kim, and Jiho Lee for their comments and suggestions. The author also thanks seminar participants at the Bank of Korea.
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Contents
1 Intro duction 2 Mo del 2.1 Preferences . . . . . . . 2.2 Endowments . . . . . . 2.3 Production technology . 2.4 The capital market . . . 2.5 Entrepreneurs’ Problem 2.6 Occupational Choice . . 2.7 Consumers’ problem . . 2.8 Competitive Equilibrium 1 4 4 4 5 5 6 8 9 10 11 18 19 21 24 25 27 28
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3 Calibration and Baseline Economy 4 Policy Exp eriments 4.1 Comparison with the Past . . . . . . . 4.2 Experiments with Policy Variables . . 4.2.1 Effects on Output . . . . . . . 4.2.2 Effects on Income Distribution 4.2.3 Effects on Tax Revenue . . . .
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5 Policy Implications and Further Research Suggestions
The Determinants of Informal Sector and Their Effects on the Economy: the Case of Korea
In this study, we adopt a general equilibrium model with occupational choice and incomplete contract enforcement to evaluate


Full Text
Title The determinants of informal sector and their effects on the economy
Similar Titles
Sub Title

The case of Korea

Material Type Reports
Author(English)

Joo, Donghun

Publisher

[Seoul]:The Bank of Korea(Institute for Monetary and Economic Research)

Date 2009-09
Series Title; No Working Paper
Pages 38
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Economic System
Holding The Bank of Korea; KDI School

Abstract

In this study, we adopt a general equilibrium model with occupational choice and incomplete contract enforcement to evaluate the effects of policies for reducing the size of the informal economy. More concretely, we try to quantify the effects of tax, entry cost, and contract enforcement on output, income distribution, and tax revenue. The model is specifically calibrated to the Korean economy. Under the assumption of endogenously determined interest rate, the effects of policies on total output are restrictive. However, the demand effect shows that entry cost and contract enforcement have signifcant potential influences on output. Lowering the tax rate increases the income inequality though the size of the informal sector shrinks. Despite the broadened tax base, there is no Laffer curve effect when the tax rate is lowered.