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Heterogeneous Agents, Inequality, and the Informal Sector in Developing Countries: A Dynamic General Equilibrium Analysis

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  • Saracoglu, Durdane Sirin

Abstract

This paper studies a three sector growth model with households differentiated in their factor endowments, resulting in asset and income inequality among the households. Production occurs in agricultural, formal manufacturing, and informal manufacturing sectors. In particular, household preferences display Engel effects in two of the goods: agricultural and informally produced goods. Income elasticity of demand for formally produced goods, on the other hand, is equal to one for all households. As the economy transitions into the long-run equilibrium with the process of capital accumulation, the importance of agricultural and informal sectors diminish, and that of the formal sector increases, given any degree of inequality. However, with higher degrees of inequality, that is, if capital and land are concentrated in the hands of a few and not distributed more evenly among all households, the results from model simulations indicated that in the long run, the economy ends up with a slightly larger informal sector and a smaller formal sector.

Suggested Citation

  • Saracoglu, Durdane Sirin, 2003. "Heterogeneous Agents, Inequality, and the Informal Sector in Developing Countries: A Dynamic General Equilibrium Analysis," Conference papers 331105, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331105
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    3. Huang, Jikun & Rozelle, Scott, 2002. "The Nature And Distortions To Agricultural Incentives In China And Implications Of Wto Accession," Working Papers 11970, University of California, Davis, Department of Agricultural and Resource Economics.
    4. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, December.
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