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

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Author Info
John Bennett () (Brunel University and IZA)
Saul Estrin () (London School of Economics and IZA)

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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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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
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Handle: RePEc:iza:izadps:dp2950

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Related research
Keywords: informal sector entry developing economy

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Find related papers by JEL classification:
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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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.:
  1. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December. [Downloadable!] (restricted)
    Other versions:
  2. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics. [Downloadable!]
    Other versions:
  3. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December. [Downloadable!] (restricted)
    Other versions:
  4. Hausmann, Ricardo & Hwang, Jason & Rodrik, Dani, 2006. "What You Export Matters," CEPR Discussion Papers 5444, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January. [Downloadable!] (restricted)
  8. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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