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Income Distribution and the Size of the Informal Sector

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Author Info
Diego Winkelried (St John's College, Cambridge)

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Abstract

This paper studies the role of income distribution as a determinant of the size of the informal sector in an economy by relying on a channel whereby inequality affects the behaviour of aggregate demand and thus influences the incentives a firm has to become informal. It is further postulated that income distribution affects the response of the informal sector to different fiscal policies, either demand or supply-orientated. The main findings are that high inequality leads to a large informal sector, and that redistribution towards the middle class decreases the size of the informal sector and increases the capacity of fiscal instruments to reduce informality. Empirical evidence for Mexican cities is provided.

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Publisher Info
Paper provided by EconWPA in its series Development and Comp Systems with number 0512005.

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Length: 26 pages
Date of creation: 06 Dec 2005
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Handle: RePEc:wpa:wuwpdc:0512005

Note: Type of Document - pdf; pages: 26
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Web page: http://129.3.20.41

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Related research
Keywords: Income distribution market size informal sector.

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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  21. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
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