Abstract: This paper tracks the effects of consumer monitoring on firms’ tax evasion up the supply chain. To do so, I study a Mongolian government program, which incentivises consumers to report their purchases. First, I estimate the effect of the program on corporate income tax (CIT) and value-added tax (VAT), by comparing retailers who are directly affected, and wholesalers, who are only indirectly affected. I find that retailers increase their reported sales, but partly offset this by inflating their costs on CIT returns. As a result, retailers’ CIT liabilities increase by 11%. In comparison, their VAT liabilities increase by 31% because VAT is less prone to such cost manipulation. Second, I find that the program also increases the VAT liabilities of upstream firms by about 15% when they are more likely to sell to (monitored) retailers, compared to the upstream firms that sell to firms that are not directly monitored. The program does not, however, affect the upstream firms’ reported CIT liabilities. My findings highlight the enforcement advantage of VAT compared to CIT and that consumer monitoring enhances the self-enforcing mechanism in VAT.
Resource Misallocation and Learning-by-Doing
Abstract: This paper investigates a trade-off between static and dynamic optimality conditions for resource allocation across firms in the presence of learning-by-doing (LBD). The standard static efficiency requires firms to have the same marginal revenue products (MRP) within each sector. In contrast, I show theoretically that dynamic efficiency condition implies dispersion in the MRP across firms when productivity growth is endogenous due to LBD. I then compare the implications of the dynamic and static models quantitatively using firm-level panel data from Indonesia. I show that firms’ productivity growth is consistent with LBD, whereby small and younger firms have lower productivity, but higher productivity growth compared to larger and older firms. I simulate the dynamic model and find that aggregate productivity is higher in the long run when we allow for some dispersion in MRP.
Selected Work-in-Progress
“Characterising Tax-Evading Firms: Evidence from Mongolia”
Abstract: Understanding which firms evade taxes is important for developing economies who are trying to broaden their tax base and ensure equitable compliance. In this paper I characterise tax-evading firms using a Mongolian government program, which incentivises consumers to report their purchases. I find that as in other countries, this consumer monitoring increases firms’ reported sales and tax liabilities. I then study the firms that reported an abnormally large growth in their sales in the year that the program was launched, which suggests that those firms had previously been evading more taxes. I find that tax evasion was particularly prevalent among smaller firms, and conditional on firm size it was more common among older firms. My findings also suggest that tax evasion was more common in the capital city.
“Cultural Persistence and Firm Productivity: Evidence from 15th Century Chinese Immigration to Indonesia”
(with Quoc-Ahn Do, Kieu-Trang Nguen, and Dana Kassem)