IDEAS home Printed from
   My bibliography  Save this article

The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil




We test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agent's ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller and employ a lower capital-labor ratio. When education is an imperfect proxy for ability, the model predicts that the interaction of the manager's education and formality is positively correlated with firm size. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Áureo De Paula & José A. Scheinkman, 2011. "The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 8-26, May.
  • Handle: RePEc:bla:revinw:v:57:y:2011:i::p:s8-s26

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    1. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
    2. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
    3. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, January.
    4. Áureo de Paula & Jose A. Scheinkman, 2010. "Value-Added Taxes, Chain Effects, and Informality," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 195-221, October.
    5. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters,in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130 National Bureau of Economic Research, Inc.
    6. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
    7. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    8. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
    9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    10. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
    11. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2009. "Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program," IZA Discussion Papers 4531, Institute for the Study of Labor (IZA).
    12. repec:hrv:faseco:30728045 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2016. "Dual Corporate Tax Evasion," Discussion Papers dp16-12, Department of Economics, Simon Fraser University.
    2. Frédéric Docquier & Tobias Müller & Joaquín Naval, 2017. "Informality and Long-Run Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(4), pages 1040-1085, October.
    3. Mukherjee, Sacchidananda & Rao, R. Kavita, 2017. "Determinants of Registration of Unincorporated Enterprises under State Value Added Tax Act in India," MPRA Paper 81236, University Library of Munich, Germany.
    4. Semih Tumen, 2017. "Entrepreneurship in the shadows," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(2), pages 239-269, April.
    5. de Vries, Gaaitzen J. & Erumban, Abdul A. & Timmer, Marcel P. & Voskoboynikov, Ilya & Wu, Harry X., 2012. "Deconstructing the BRICs: Structural transformation and aggregate productivity growth," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 211-227.
    6. Tanaka, Kiyoyasu & Hashiguchi, Yoshihiro, 2015. "Agglomeration effects of informal sector: evidence from Cambodia," IDE Discussion Papers 495, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    7. Kumler, Todd J. & Verhoogen, Eric & Frias, Judith A., 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," IZA Discussion Papers 7591, Institute for the Study of Labor (IZA).
    8. Antonis Adam & Thomas Moutos, 2017. "The Modality of Fiscal Consolidation and Current Account Adjustment," CESifo Economic Studies, CESifo, vol. 63(2), pages 162-181.
    9. Becker, Dennis, 2014. "Heterogeneous Firms and Informality: The Effects of Trade Liberalization on Labor Markets," Working Papers 180124, Cornell University, Department of Applied Economics and Management.
    10. Becker, Dennis, 2014. "Informality among multi-product firms," Working Papers 250009, Cornell University, Department of Applied Economics and Management.
    11. Xinshen Diao & Josaphat Kweka & Margaret McMillan, 2016. "Economic Transformation in Africa from the Bottom Up: Evidence from Tanzania," NBER Working Papers 22889, National Bureau of Economic Research, Inc.
    12. Tanaka, Kiyoyasu & Keola, Souknilanh, 2015. "Shedding light on the shadow economy : a nighttime light approach," IDE Discussion Papers 531, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    13. Cravo, Túlio A., 2011. "Are small employers more cyclically sensitive? Evidence from Brazil," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 754-769.
    14. Norman V. Loayza, 2016. "Informality in the Process of Development and Growth," The World Economy, Wiley Blackwell, vol. 39(12), pages 1856-1916, December.
    15. repec:dgr:rugggd:gd-121 is not listed on IDEAS
    16. repec:fgv:epgrbe:v:66:n:2:a:4 is not listed on IDEAS
    17. Catalina Granda & Franz Hamann, 2015. "Informality, Saving and Wealth Inequality in Colombia," IDB Publications (Working Papers) 88196, Inter-American Development Bank.
    18. Catalina Granda & Franz Hamann, 2015. "Informality, Saving and Wealth Inequality," Borradores de Economia 873, Banco de la Republica de Colombia.
    19. Pavnesh Kumar, 2013. "BRICS:The rise of sleeping giant," Working papers 2013-6-17, Voice of Research.
    20. Bobba, Matteo & Flabbi, Luca & Levy Algazi, Santiago, 2017. "Labor Market Search, Informality and Schooling Investments," IZA Discussion Papers 11170, Institute for the Study of Labor (IZA).
    21. Corseuil, Carlos Henrique L. & Foguel, Miguel Nathan, 2012. "Economic expansion and increase in labout market formality: A poaching approach," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 66(2), June.
    22. Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2017. "Shades of Grey: Business Compliance with Fiscal and Labour Regulations," Discussion Papers dp17-07, Department of Economics, Simon Fraser University.
    23. Ceyhun Elgin & Burak Sezgin, 2017. "Sectoral Estimates of Informality: A New Method and An Application to Turkish Economy," Working Papers 2017/02, Bogazici University, Department of Economics.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:revinw:v:57:y:2011:i::p:s8-s26. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.