Misallocation, Informality and Human Capital
AbstractWe develop a theory of total factor productivity with heterogeneous firms, to explain differences in human capital across countries. In our model, firms operate in an economy with capital markets imperfections and costs of creating and operating in the formal sector. These distortions give rise to endogenous formal and informal sectors. Formal firms have a larger set of production opportunities but informal firms can avoid the costs of formalization. The model predicts that countries with a low degree of debt enforcement and high costs of formality are characterized by low allocative efficiency and a larger informal sector, lower TFP and lower human capital accumulation. We find that this mechanism is important in generating the skill distribution observed in developing countries.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 881.
Date of creation: 2011
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Other versions of this item:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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