Misallocation, Informality, and Human Capital
AbstractWe develop a theory of total factor productivity to understand differences in pro- ductivity and human capital across countries. In our model, firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by low allocative efficiency and a larger informal sector, lower measured TFP, and lower stocks of skilled workers. We find that this mechanism plays an important role in generating the differences observed between the US and de- veloping countries in the human capital stock. Moreover, formal sector entry costs and financial frictions are complementary and their joint effect is the main driver of the dif- ferences between the US and developing countries in terms of human capital, informality, and TFP. The complementarity effect is generated by the introduction of skilled workers, which increases the labor substitution incentives, which in turn moves the firm closer to the financial constraint.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 401.
Length: 44 pages
Date of creation: Feb 2012
Date of revision:
Contact details of provider:
Web page: http://www.virginia.edu/economics/home.html
Financial Structure; Informal Sector; Productivity; Policy Distortions; Human Capital.;
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 - - 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
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.:
- Levon Barseghyan & Riccardo DiCecio, 2009.
"Entry costs, misallocation, and cross-country income and TFP differences,"
2009-005, Federal Reserve Bank of St. Louis.
- Riccardo DiCecio & Levon Barseghayn, 2009. "Entry Costs, Misallocation, and Cross-Country Income and TFP Differences," 2009 Meeting Papers 428, Society for Economic Dynamics.
- Hernan Moscoso Boedo & Toshihiko Mukoyama, 2012.
"Evaluating the effects of entry regulations and firing costs on international income differences,"
Journal of Economic Growth,
Springer, vol. 17(2), pages 143-170, June.
- Hernan J. Moscoso Boedo & Toshihiko Mukoyama, 2011. "Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences," Virginia Economics Online Papers 379, University of Virginia, Department of Economics.
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
- Hernan Moscoso Boedo & Pablo D'Erasmo, 2010.
"Financial Structure, Informality and Development,"
2010 Meeting Papers
319, Society for Economic Dynamics.
- Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2008.
"Plant-Size Distribution and Cross-Country Income Differences,"
NBER Working Papers
14060, National Bureau of Economic Research, Inc.
- Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
- Miriam Bruhn, 2011.
"License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico,"
The Review of Economics and Statistics,
MIT Press, vol. 93(1), pages 382-386, February.
- Bruhn, Miriam, 2008. "License to sell : the effect of business registration reform on entrepreneurial activity in Mexico," Policy Research Working Paper Series 4538, The World Bank.
- Yongseok Shin & Joe Kaboski & Francisco J. Buera, 2008.
"Finance and Development: A Tale of Two Sectors,"
2008 Meeting Papers
955, Society for Economic Dynamics.
- Arellano, Cristina & Bai, Yan & Zhang, Jing, 2012.
"Firm dynamics and financial development,"
Journal of Monetary Economics,
Elsevier, vol. 59(6), pages 533-549.
- Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm Dynamics and Financial Development," NBER Working Papers 15193, National Bureau of Economic Research, Inc.
- Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm dynamics and financial development," Staff Report 392, Federal Reserve Bank of Minneapolis.
- Yan Bai & Jing Zhang & Cristina Arellano, 2009. "Firm Dynamics and Financial Development," 2009 Meeting Papers 152, Society for Economic Dynamics.
- Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, October.
- Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers 1046, OECD Publishing.
- Hernan J. Moscoso Boedo & Toshihiko Mukoyama, 2011.
"Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences,"
Virginia Economics Online Papers
379, University of Virginia, Department of Economics.
- Hernan Moscoso Boedo & Toshihiko Mukoyama, 2012. "Evaluating the effects of entry regulations and firing costs on international income differences," Journal of Economic Growth, Springer, vol. 17(2), pages 143-170, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Debby Stanford).
If references are entirely missing, you can add them using this form.