The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil
AbstractWe test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agent's ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller and employ a lower capital-labor ratio. When education is an imperfect proxy for ability, the model predicts that the interaction of the manager's education and formality is positively correlated with firm size. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.
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Bibliographic InfoArticle provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.
Volume (Year): 57 (2011)
Issue (Month): (05)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0034-6586
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Other versions of this item:
- Aureo de Paula & Jose A. Scheinkman, 2009. "The Informal Sector: An Equilibrium Model and Some Empirical Evidence from Brazil," PIER Working Paper Archive 09-044, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
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