The Informal Sector: An Equilibrium Model and Some Empirical Evidence from Brazil, Second Version
AbstractWe test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agent's ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller, and employ a lower capital-labor ratio. The model predicts that the interaction of an index of observable inputs to entrepreneurial ability and formality is positively correlated with firm size, which we verify in the data. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-024.
Length: 30 pages
Date of creation: 30 Nov 2009
Date of revision: 26 Jul 2010
Informal Sector; Tax Avoidance; Brazil;
Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-07-31 (Accounting & Auditing)
- NEP-ALL-2010-07-31 (All new papers)
- NEP-ENT-2010-07-31 (Entrepreneurship)
- NEP-PBE-2010-07-31 (Public Economics)
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.:
- Gabriela Inchauste & Mark Gradstein & Era Dabla-Norris, 2005.
"What Causes Firms to Hide Output? The Determinants of Informality,"
IMF Working Papers
05/160, International Monetary Fund.
- Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
- Araujo, Luis & Ponczek, Vladimir P., 2012. "Informal wages in an economy with active labor courts," Textos para discussÃ£o 294, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
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