Informality, Corruption and Trade Reform
AbstractStringent regulations coupled with corruption generate and sustain extra legal or informal transactions in the developing countries. Does trade related reform discourage informal activities and corruption? This paper attempts to analyze such a phenomenon. An import competing firm allocates production between a high wage formal and a low wage informal segment. Illegal use of labour in the informal sector is characterized by a probability of punishment which depends on the size of the informal output. In such a structure, as tariff comes down, total employment contracts but the informal sector expands. However, lowering of interest rate, possibly through the liberalization of capital account, tends to reduce the size of the informal segment. Hence, trade reforms may have conflicting impact on informality and corruption.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 22896.
Date of creation: May 2011
Date of revision:
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More information through EDIRC
Trade Liberalization; Informal sector; corruption;
Other versions of this item:
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
- NEP-INT-2011-11-21 (International Trade)
- NEP-IUE-2011-11-21 (Informal & Underground Economics)
- NEP-LAB-2011-11-21 (Labour Economics)
- NEP-REG-2011-11-21 (Regulation)
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