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Heterogeneous firms and the impact of government policy on welfare and informality

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  • Mendicino, Caterina
  • Prado, Mauricio

Abstract

We analyze the formality benefits through productivity-enhancing public goods. We document that: benefits from formality matter for firms’ optimal decisions; there is a disconnect between the objectives of maximizing formality versus welfare; this disconnect is mitigated under higher formality benefits.

Suggested Citation

  • Mendicino, Caterina & Prado, Mauricio, 2014. "Heterogeneous firms and the impact of government policy on welfare and informality," Economics Letters, Elsevier, vol. 124(1), pages 151-156.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:1:p:151-156
    DOI: 10.1016/j.econlet.2014.04.018
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    References listed on IDEAS

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    1. D'Erasmo, Pablo N. & Moscoso Boedo, Hernan J., 2012. "Financial structure, informality and development," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 286-302.
    2. Andreas Buehn & Friedrich Schneider, 2012. "Shadow economies around the world: novel insights, accepted knowledge, and new estimates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 139-171, February.
    3. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    4. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    5. Prado, Mauricio, 2011. "Government policy in the formal and informal sectors," European Economic Review, Elsevier, vol. 55(8), pages 1120-1136.
    6. Acemoglu, Daron, 2005. "Politics and economics in weak and strong states," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1199-1226, October.
    7. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 645-661.
    8. 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.
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    Cited by:

    1. Lahlou, Kamal & Doghmi, Hicham & Schneider, Friedrich, 2020. "The Size and Development of the Shadow Economy in Morocco," Document de travail 2020-3, Bank Al-Maghrib, Département de la Recherche.
    2. João Ricardo Faria & Laudo Ogura & Mauricio Prado & Christopher J. Boudreaux, 2023. "Government investments and entrepreneurship," Small Business Economics, Springer, vol. 61(4), pages 1657-1670, December.
    3. João Ricardo Faria & Mauricio Prado & João J. Ferreira, 2022. "Informality, Infrastructure Investments, and New Firms’ Creation: The Location Strategy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 321-331, March.
    4. Laudo M Ogura, 2018. "Informality and exogenous regulations in regional economies," Economics Bulletin, AccessEcon, vol. 38(2), pages 892-900.

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    More about this item

    Keywords

    Firm heterogeneity; Production complementarity; Taxation; Enforcement; Regulation;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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