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Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?

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  • Bennett, John

Abstract

We analyse potential dynamic benefits for a firm from having the option of adopting informal status. Informality may be a stepping stone, without which formality might never be achieved. This result obtains for a broad range of realistic parameter values, suggesting a potential dynamic case for government support of informal firms. Informality may alternatively play a converse role as a consolation prize, a firm only entering an industry (formally) because it recognizes that if profitability is disappointing, it can switch to informality. However, this result obtains for a range of parameter values so narrow to be of no practical significance.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2009/RP2009-19.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number UNU-WIDER Research Paper RP2009/19.

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Length: 28
Date of creation: 2009
Date of revision:
Handle: RePEc:unu:wpaper:rp2009-19

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Keywords: informality; entrepreneurship;

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  1. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December.
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  13. Sarte, Pierre-Daniel G., 2000. "Informality and rent-seeking bureaucracies in a model of long-run growth," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 173-197, August.
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Cited by:
  1. Bruck, Tilman & Naude, Wim & Verwimp, Philip, 2013. "Entrepreneurship and violent conflict in developing countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Thai, Mai Thi Thanh & Turkina, Ekaterina, 2014. "Macro-level determinants of formal entrepreneurship versus informal entrepreneurship," Journal of Business Venturing, Elsevier, vol. 29(4), pages 490-510.
  3. Naude, Wim, 2009. "Entrepreneurship is not a Binding Constraint on Growth and Development in the Poorest Countries," Working Paper Series Research Paper No. 2009-4, World Institute for Development Economic Research (UNU-WIDER).
  4. Bruhn, Miriam, 2013. "A tale of two species: Revisiting the effect of registration reform on informal business owners in Mexico," Journal of Development Economics, Elsevier, vol. 103(C), pages 275-283.

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