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Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy

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  • John Bennett

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  • Saul Estrin

Abstract

We model decisions with respect to formality or informality for entrepreneurs in a new industry for a developing economy. We show that informality allows a leader to explore, without significant sunk costs, the potential profitability of the industry; that is, informality may be a stepping stone, enabling an entrepreneur to experiment cheaply in an uncertain environment. There are circumstances under which, without this option, the industry would not become established. We analyse the roles of parameters such as a minimum wage rate and we show that the existence of finance constraints can actually encourage entry in this context.

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Bibliographic Info

Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 07-11.

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Length: 44 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:edb:cedidp:07-11

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References

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  1. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  2. Ricardo Hausmann & Dani Rodrik, 2002. "Economic Development as Self-Discovery," NBER Working Papers 8952, National Bureau of Economic Research, Inc.
  3. Arne Bigsten & Peter Kimuyu & Karl Lundvall, 2004. "What to Do with the Informal Sector?," Development Policy Review, Overseas Development Institute, vol. 22(6), pages 701-715, November.
  4. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
  5. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
  6. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  7. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2005. "What You Export Matters," NBER Working Papers 11905, National Bureau of Economic Research, Inc.
  8. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
  9. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  10. Fields, Gary S., 2005. "A guide to multisector labor market models," Social Protection Discussion Papers 32547, The World Bank.
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Cited by:
  1. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
  2. John Bennett, 2008. "Formality, Informality, and Social Welfare," CEDI Discussion Paper Series 08-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
  3. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
  4. Joanna Tyrowicz & Stanisław Cichocki, 2011. "Employed unemployed? On shadow employment in transition," Empirica, Springer, vol. 38(2), pages 259-281, May.
  5. Demirguc-Kunt, Asli & Klapper, Leora F. & Panos, Georgios A., 2009. "Entrepreneurship in post-conflict transition : the role of informality and access to finance," Policy Research Working Paper Series 4935, The World Bank.
  6. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers 2010-05, Faculty of Economic Sciences, University of Warsaw.
  7. Tilman Brück & Fernanda Llussá & José Tavares, 2010. "Perceptions, Expectations, and Entrepreneurship: The Role of Extreme Events," Discussion Papers of DIW Berlin 1093, DIW Berlin, German Institute for Economic Research.

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