Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Theory of the Informal Sector

Contents:

Author Info

Abstract

In many countries, especially poor countries, a heavy burden of taxes, bribes, and bureaucratic hassles drives many producers into the informal sector. Is this situation explicable only as a consequence of either the ignorance or the ineptitude of the state authorities? On the contrary this paper shows that we can attribute the existence of a large informal sector to the fact that, because productive endowments contain important unobservable components, the state cannot adjust the amounts that it extracts from producers in the formal sector according to each producer's endowment. Given this fact we find that, if either the distribution of endowments is sufficiently inegalitarian or the production of private substitutes for public services is sufficiently easy, then the state would extract a large enough amount from producers in the formal sector that poorly endowed producers would choose to work in the informal sector. This result obtains both for a proprietary state, which maximizes its own net revenue, and for a hypothetical benevolent state, which would maximize the total net income of producers. But, we also find that a proprietary state would create an informal sector for a larger set of combinations of parameter values than would a hypothetical benevolent state.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.econ.brown.edu/2002/wp2002_07.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Brown University, Department of Economics in its series Working Papers with number 2002-07.

as in new window
Length:
Date of creation: 2002
Date of revision:
Handle: RePEc:bro:econwp:2002-07

Contact details of provider:
Postal: Department of Economics, Brown University, Providence, RI 02912

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June.
  2. Herschel I. Grossman & Suk Jae Noh, 1990. "A Theory Of Kleptocracy With Probabilistic Survival And Reputation," Economics and Politics, Wiley Blackwell, vol. 2(2), pages 157-171, 07.
  3. Grossman, Herschel I. & Noh, Suk Jae, 1994. "Proprietary public finance and economic welfare," Journal of Public Economics, Elsevier, vol. 53(2), pages 187-204, February.
  4. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
  5. Herschel I. Grossman, 1999. "The State: Agent or Proprieter," Working Papers 99-3, Brown University, Department of Economics.
  6. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  7. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gabriela Inchauste & Mark Gradstein & Era Dabla-Norris, 2005. "What Causes Firms to Hide Output? the Determinants of Informality," IMF Working Papers 05/160, International Monetary Fund.
  2. Olaf J. de Groot & Matthew D. Rablen & Anja Shortland, 2011. "Gov-aargh-nance: "Even Criminals Need Law and Order"," Economics of Security Working Paper Series 46, DIW Berlin, German Institute for Economic Research.
  3. repec:wii:bpaper:bowp:050 is not listed on IDEAS
  4. Prado, Jr., Jose Mauricio, 2007. "Government Policy in the Formal and Informal Sectors," Seminar Papers 751, Stockholm University, Institute for International Economic Studies.
  5. Dario Cziraky & Max Gillman, 2004. "Inflation and Endogenous Growth in Underground Economies," wiiw Balkan Observatory Working Papers 50, The Vienna Institute for International Economic Studies, wiiw.
  6. Sanchez-Pages, Santiago & Straub, Stéphane, 2008. "The Emergence of Institutions," IDEI Working Papers 545, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  8. Gatti, Roberta & Honorati, Maddalena, 2007. "Informality among Formal Firms: Firm-level, Cross-country Evidence on Tax Compliance and Access to Credit," CEPR Discussion Papers 6597, C.E.P.R. Discussion Papers.
  9. Johanna D'Hernoncourt & Pierre-Guillaume Méon, 2012. "The not so dark side of trust: Does trust increase the size of the shadow economy?," ULB Institutional Repository 2013/98287, ULB -- Universite Libre de Bruxelles.
  10. Titas Kumar Bandopadhyay, 2007. "Trade Reform, Capital Mobility, and Efficiency Wage in a Harris-Todaro Economy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(2), pages 163-174.
  11. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bro:econwp:2002-07. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Brown Economics Webmaster).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.