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

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  • Bennett, John

    ()
    (Brunel University)

  • Estrin, Saul

    ()
    (London School of Economics)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2950.

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Length: 45 pages
Date of creation: Jul 2007
Date of revision:
Publication status: published as 'Informal firms in developing countries: entrepreneurial stepping stone or consolation prize?' in Small Business Economics, 2010, 34 (1), 53-63
Handle: RePEc:iza:izadps:dp2950

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Keywords: developing economy; entry; informal sector;

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  1. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  2. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 101, Edinburgh School of Economics, University of Edinburgh.
  3. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics.
  4. 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.
  5. Fields, Gary S., 2005. "A guide to multisector labor market models," Social Protection Discussion Papers 32547, The World Bank.
  6. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self Discovery," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3356, C.E.P.R. Discussion Papers.
  7. Hausmann, Ricardo & Hwang, Jason & Rodrik, Dani, 2006. "What You Export Matters," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5444, C.E.P.R. Discussion Papers.
  8. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  9. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
  10. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(2), pages 275-302, May.
  11. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
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Cited by:
  1. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," NBER Working Papers 14520, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. John Bennett, 2008. "Formality, Informality, and Social Welfare," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 08-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
  5. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 97(1), pages 88-98.
  6. Joanna Tyrowicz & Stanisław Cichocki, 2011. "Employed unemployed? On shadow employment in transition," Empirica, Springer, Springer, vol. 38(2), pages 259-281, May.
  7. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers 2010-05, Faculty of Economic Sciences, University of Warsaw.

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