Informality and rent-seeking bureaucracies in a model of long-run growth
AbstractThis paper explores the links among growth, the informal economy, and rent-seeking bureaucracies. The presence of congestion associated with the enforcement of property right implies that informality can be useful. Whether bureaucratic rent-seeking is detrimental to growth then depends on how good a substitute informality is to production in the formal sector. In order to create profits which can be appropriated, rent-seeking bureaucrats limit entry into the formal economy. As a result, firms operate in the informal sector even when the cost of informality is high, in which case lower growth emerges. However, when the cost of informality is low, a large number of firms choose to operate informally irrespective of entry conditions. In the latter case, growth is unaffected by a rent-seeking bureaucracy as entry restrictions in the formal economy do not bind.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 46 (2000)
Issue (Month): 1 (August)
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Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper 99-07, Federal Reserve Bank of Richmond.
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