Bureaucracy, Informality and Taxation Essays in Development Economics and Public Finance

Abstract: This thesis consists of three self-contained essays.Essay 1, "Dispatchers", is a study of a specialized service sector that has arisen in many developing countries.It is a well-established fact that the government bureaucracy in many developing countries is large, difficult to understand, non-transparent and time-consuming. However, "de jure" procedures sometimes have little to do with how firms or individuals actually go about when dealing with the government bureaucracy. One institution that has emerged is a specialized intermediary, henceforth called dispatcher, that assists individuals and firms in their contacts with the public sector. A model is developed to study the effects of dispatchers on time and resources spent in obtaining licenses, on informality and on the incentives of bureaucrats and dispatchers to make regulation more/less complicated.Essay 2, "Informal firms, investment incentives and formalization", studies informal firms in developing countries.In a typical developing country, the majority of small firms are informal and entry costs into formality are high. What can we expect in terms of firm investment, growth and formalization in such a setting? I show that investment and growth trajectories differ substantially between firms that choose to formalize and those that do not. The formalization decision depends non-trivially on the informal firm's productivity. This, in turn, has an effect on how policies should be designed. The long-run firm size distribution exhibits a "missing middle" and depends on the initial firm-level stock of capital, a result that can be interpreted as a poverty trap.Essay 3, "Compositional and dynamic Laffer effects in a model with constant returns to scale", studies dynamic effects of tax cuts.The possibility of tax cuts paying for themselves over time seems like an attractive option for policy makers. In a constant returns to scale model, I study conditions under which reductions in capital taxes are self-financing