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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. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
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  4. Arne Bigsten & Mans Söderbom, 2006. "What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?," World Bank Research Observer, World Bank Group, World Bank Group, vol. 21(2), pages 241-265.
  5. Mariano Bosch, 2006. "Job creation and job destruction in the presence of informal labour markets," LSE Research Online Documents on Economics 19785, London School of Economics and Political Science, LSE Library.
  6. Teal, Francis, 1996. "The Size and sources of economic rents in a developing country manufacturing labour market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(437), pages 963-76, July.
  7. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
  8. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
  9. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
  10. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  11. Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
  12. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  13. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
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  15. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  16. Parker,Simon C., 2006. "The Economics of Self-Employment and Entrepreneurship," Cambridge Books, Cambridge University Press, number 9780521030632, 9.
  17. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  18. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  19. 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.
  20. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
  21. John Bennett & Saul Estrin, 2007. "Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy," CEDI Discussion Paper Series 07-11, Centre for Economic Development and Institutions(CEDI), Brunel University.
  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. Bennett, John, 2009. "Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Petr Huber & Ulugbek Rahimov, 2014. "Formal and Informal Sector Wage Differences in Transition Economies: Evidence from Tajikistan," MENDELU Working Papers in Business and Economics, Mendel University in Brno, Faculty of Business and Economics 2014-48, Mendel University in Brno, Faculty of Business and Economics.
  3. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.

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