The informal sector as a substitute for social security
AbstractWe consider an economy with two groups of individuals, rich and poor. A central authority can either directly redistribute income to the poor, or allow for some degree of informality in economic activities by not enforcing property rights. The optimal degree of informality depends upon the characteristics of the resources used by the poor if property rights are not perfectly enforced. It is shown that the degree of enforcement falls if the resource is becoming less rivalrous in use. Hence, the informal sector is a better substitute for social security, the more the resources used by the informal sector have the character of public goods. We explore the basic trade-offs and discuss the special cases of anarchy, perfect civil society and the absence of a welfare state. In addition to this we analyze the similarities and differences between a welfare-maximizing state and a predatory state. --
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Bibliographic InfoPaper provided by University of Konstanz, Department of Economics in its series Discussion Papers, Series 1 with number 316.
Date of creation: 2002
Date of revision:
Find related papers by JEL classification:
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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