Financial Development and the Underground Economy

We provide a theoretical and empirical study of the relation between financial development and the size of the underground economy. In our theoretical framework agents allocate investment between a low-return technology which can be operated with internal funds, and a high-return technology which requires external finance. Firms can reduce the cost of funding by disclosing part or all of their assets and pledging them as collateral. The disclosure decision, however, also involves higher tax payments and reduces tax evasion. We show that financial development (a reduction in the cost of external finance) can reduce tax evasion and the size of the underground economy. We test the main implications of the model using Italian microeconomic data that allow us to construct a micro-based index of the underground economy. In line with the model’s predictions, we find that local financial development is associated with a smaller size of the underground economy, controlling for the potential endogeneity of financial development and other determinants of the underground economy.Underground Economy, Financial Development.

Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach

Informality is a wide-spread phenomenon across the globe. We show that firms in countries with better information sharing systems and greater financial sector outreach evade taxes to a lesser degree, an effect that is stronger for smaller firms, firms in smaller cities and towns, and firms in industries relying more on external financing, with higher liquidity needs and with greater growth potential. However, it is variation in firm size that dominates firm variation in location and industry variation in explaining cross-firm and cross-country variation in tax evasion. This effect is robust to controlling for an array of other measures of the financial and institutional environment firms face. The effect is also robust to controlling for fixed firm effects in a smaller panel dataset of Central and Eastern European countries many of which introduced credit registries or upgraded them in the early 2000s.Formal and informal sector;tax evasion;financial sector development

Current Account Composition and Sustainability of External Debt

If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital the external debt (ED) does not change, i.e.: the CA deficit does not add to ED. This is no paradox. It simply comes from the definition of CA deficit and ED and points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads vis à vis US lending rates we assess the sustainability of CA deficits. We find that FDI net inflows (proxy of equity capital) allow emerging economies to sustain larger CA imbalances with respect to CA deficits financed by inflows of more liquid assets. Equity capital is a way to finance the CA. It does not contribute to the ED and it affects the solvency assessment of a country.Equity capital, FDI, CA deficit, external debt

Sources of pro-cyclicality in east Asian financial systems

Procyclicality is a normal feature of economic systems, but financial sector weaknesses can exacerbate it sufficiently to pose a threat to macroeconomic and financial stability. These include shortcomings in bank risk management and governance, in supervision and in terms of dependence on volatile sources of funds. The paper tests econometrically for the importance of such features leading to pro-cyclicality in the financial systems of 11 East Asian countries. This analysis makes it possible to identify specific policy measures for East Asian countries that could limit the extent to which financial systems exacerbate pro-cyclicality

Property Rights, Finance, and Entrepreneurship

Is investment constrained more by insecure property rights or by limited external finance? For five transition economies in Eastern Europe and the former Soviet Union we find that weak property rights limit the reinvestment of profits in startup ma nufacturing firms. Access to credit does not appear to explain differences in investment. At least in the early stages of post-communist reform, retained earnings appear to have been enough to finance the investments that managers wanted to make.

Effects of Age Misreporting on Mortality Estimates at Older Ages

This study examines how age misreporting typically affects estimates of mortality at older ages. We investigate the effects of three patterns of age misreporting & age overstatement, age understatement, and symmetric age misreporting & on mortality estimates at ages 40 and above. We consider five methods to estimate mortality: conventional estimates derived from vital statistics and censuses; longitudinal studies where age is identified at baseline; variable-r procedures based on age distributions of the population; variable-r procedures based on age distributions of deaths; and extinct generation methods. For each of the age misreporting patterns and each of the methods of mortality estimation, we find that age misstatement biases mortality estimates downwards at the oldest ages

Property Rights and Finance

Which is the tighter constraint on private sector investment: weak property rights or limited access to external finance? From a survey of new firms in post-communist countries, we find that weak property rights discourage firms from reinvesting their profits, even when bank loans are available. Where property rights are relatively strong, firms reinvest their profits; where they are relatively weak, entrepreneurs do not want to invest from retained earnings.

Securitization, bank behaviour and financial stability: A systematic review of the recent empirical literature

We systematically review the recent empirical literature to investigate whether and how securitization influences bank behaviour and its implication on financial stability. We find that, in the years preceding the 2007–2009 financial crisis, banks with higher credit and market risk were more likely to securitize assets. Banks became riskier and increased systemic risk as they took advantage of securitization in order to obtain capital relief. There is robust evidence indicating that mortgage securitization led to a deterioration in bank lending standards via weaker screening, lower denial rates, and misreporting of credit quality. For corporate loan securitization, the empirical findings on lax bank lending are inconclusive. However, it is evident that securitization resulted in poorer ex-post bank monitoring of corporate borrowers. Even though Europe is the second largest securitization market, there is a dearth of evidence on the impact of securitization on European banks' lending behaviour. Research is also very limited on the post-crisis regulatory incentive aligning mechanisms such as the risk retention requirements and the credit ratings reform. Finally, evidence on securitization activity in emerging markets, such as Latin America and China, where securitization volumes have been increasing recently, is relatively non-existent

Diversification of banking risks in the context of financial globalization

Diversification of financial activity involves the use of alternative income opportunities from various financial transactions - short-term investments, formation of the loan portfolio, portfolio of long-term investments, and the implementation of real investment. In today's highly integrated monetary relations, risk is not an integral part of the economic system. Sensibility to risk increases; factors of its occurrence are becoming more diverse, and the opportunity to diversify and these risks is less realizable in practice. Diversification of banking risks in the context of financial globalization is the basis for the stable operation of the Russian banking sector, in the context of rapidly changing external and internal market conditions, creates a safety factor of strategic development and reform the economy as a whole. Understanding that the risks for the banking activities are not so much the potential loss as possible benefits, involves the development and implementation in practice of new concepts and models of risk diversification for banking activities, leading to the quality of its content mandatory requirements of regulators in the area of risk control. © 2015, Mediterranean Center of Social and Educational Research. All rights reserved