Essays on Firms' Misreporting and Resource Misallocation
Open Access
- Author:
- Mancellari, Armela
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- April 16, 2021
- Committee Members:
- Jonathan Eaton, Major Field Member
Stephen Yeaple, Chair & Dissertation Advisor
David Abler, Outside Unit & Field Member
James Tybout, Major Field Member
Marc Albert Henry, Program Head/Chair - Keywords:
- informal employment
firms
labor adjustment costs
misallocation
multinational firms
vertical integration
taxation
transfer pricing - Abstract:
- My research examines how government policies shape firms' decisions and affect aggregate outcomes, distinguishing between misreporting and real misallocation of resources. In my dissertation, I study how labor market regulations and taxation affect firms' decisions about input use, where geographically to locate their operations, and whether and by how much to misreport their activities. I use formal modelling to understand the mechanisms at work, which I quantify by either structurally estimating the model, as in the first chapter of the dissertation, or through calibration, as in the second chapter. I use micro data from firms and households in my estimation, as well as aggregate data when testing model predictions. In Chapter 1, I explore the implications of labor market rigidities and imperfect enforcement of anti-informality regulations on firms' incentives to hire informal workers and the allocation of labor across firms. I build and estimate a dynamic model of the intensive margin of informality in which all firms are formal (i.e. registered with the tax authority), but may hire informal workers for two reasons: to evade taxes and to avoid formal labor costs, arising in part due to labor market rigidities, when adjusting to shocks. I estimate the model using simulated method of moments (SMM) and match moments from manufacturing firms in Albania, carefully distinguishing truthful reporters from evaders of labor and/or value-added taxes. A key challenge faced by most previous studies is that informal employment by formal firms is unobserved with regular frequency. I overcome this obstacle with a novel strategy that exploits a 2015 anti-informality campaign in Albania that induced firms to truthfully report their sales and labor, in order to extract information about firms' prior use of informal labor. Specifically, I use patterns of changes in reported sales and labor around the policy shock to infer which firms were most likely misreporting their activities. I find that when I estimate the model naively, assuming that all firms in my sample are truth tellers, the formal labor adjustment costs are overstated by at least a factor of two. That is mainly because firms use informal labor to avoid the cost of varying output, and thus the reported data understates variation in their actual use of labor. I also find that making informal employment prohibitively costly increases the dispersion in sales per worker by about 20 percent, which suggests that allocative efficiency is lower under perfect enforcement. Lastly, I show that policies that are aimed at reducing labor market rigidities might be more desirable than policies that step up enforcement, as they lower the share of informal employment while improving the allocation of labor in the economy. In Chapter 2, I analyze how incentives to under-report profits in higher-tax countries and over-report them in lower tax countries causes real misallocation of resources across countries. I study the extent to which differences in corporate tax rate across countries distort two decisions of the firm: where to locate production, and whether to outsource or vertically integrate suppliers of intermediate goods. I build a parsimonious general equilibrium, multi-country, international production model with heterogeneous firms. I employ the model in two ways. First, using data on U.S. Census Related Party trade and statutory corporate tax rates, I confirm the model's prediction that, the lower the tax rate of a potential production location, the higher the share of related party trade. Second, I calibrate a three-country version of the the model and conduct a counterfactual analyses. In a world populated by only the U.S., Germany, and Denmark, I show that harmonizing taxes across these three countries leads to a substantial change in the allocation of resources. Relative to the baseline tax regime of 2014, more firms choose to invest in the United States, and more firms opt for outsourcing.