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Formality, Informality, and Social Welfare

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  • Bennett, John

    ()
    (Brunel University)

Abstract

An industry is modeled in which entrepreneurs, who are heterogeneous in ability, may produce formally or informally. It is shown how the formal-informal mix depends on the distribution of ability, product demand and various parameter values. The industry equilibrium is compared to one in which informality is prohibited. With relatively high product demand, the effect of entrepreneurs being free to choose informality is that consumer surplus and total employment are reduced, but profit is redistributed towards more able entrepreneurs. With relatively low product demand the opposite effects obtain. We also show that informality may be a built-in stabilizer or destabilizer.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3550.

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Length: 42 pages
Date of creation: Jun 2008
Date of revision:
Publication status: published as 'Informal Production and Labour Market Segmentation' in: Journal of Institutional and Theoretical Economics, 2011, 167 (4), 686-707
Handle: RePEc:iza:izadps:dp3550

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Keywords: social welfare; informality; formality;

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References

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  1. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does it pay firms to register for taxes ? the impact of formality on firm profitability," Policy Research Working Paper Series 4449, The World Bank.
  2. John Bennett & Saul Estrin, 2007. "Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 07-11, Centre for Economic Development and Institutions(CEDI), Brunel University.
  3. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, Elsevier, vol. 78(2), pages 299-321, December.
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  6. Koujianou Goldberg, Pinelopi & Pavcnik, Nina, 2003. "The response of the informal sector to trade liberalization," Journal of Development Economics, Elsevier, Elsevier, vol. 72(2), pages 463-496, December.
  7. Parker,Simon C., 2004. "The Economics of Self-Employment and Entrepreneurship," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521828130.
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  10. La Ferrara, Eliana, 2003. "Kin Groups and Reciprocity: A Model of Credit Transactions in Ghana," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3705, C.E.P.R. Discussion Papers.
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  13. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1541-1553, October.
  14. Francis Teal, 1995. "The size and sources of economic rents in a developing country manufacturing labour market," CSAE Working Paper Series 1995-06, Centre for the Study of African Economies, University of Oxford.
  15. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  16. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
  17. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  18. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  19. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  20. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, Elsevier, vol. 66(2), pages 293-312, November.
  21. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, Elsevier, vol. 73(2), pages 541-557, April.
  22. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
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Cited by:
  1. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 97(1), pages 88-98.
  2. Bennett, John, 2009. "Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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