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Informality among multi-product firms

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  • Becker, Dennis

Abstract

This paper introduces product-level regulation as a new driver of informality and diversification in a model of heterogeneous multi-product firms and endogenous product choice. Firms face regulations at both the firm- and product-level and may comply with or evade either regulation. The model suggests that firm-level regulation directly causes informality by deterring firm registration. However, the product-level regulation has two effects: it directly drives product informality as evasion of product regulation leading to informality within the formal sector and indirectly deters firms from registering. Further, I demonstrate that the Gini coefficient and Herfindahl index can be implemented in multi-product firm models as revenue-based measures of product diversification. Contrary to the prediction of the commonly used product scope, the revenue-based measures indicate informal firms to be more diversified than formal firms.

Suggested Citation

  • Becker, Dennis, 2014. "Informality among multi-product firms," Working Papers 250009, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cudawp:250009
    DOI: 10.22004/ag.econ.250009
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