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Informality and rent-seeking bureaucracies in a model of long-run growth

  • Sarte, Pierre-Daniel G.

This paper explores the links among growth, the informal economy, and rent-seeking bureaucracies. The presence of congestion associated with the enforcement of property right implies that informality can be useful. Whether bureaucratic rent-seeking is detrimental to growth then depends on how good a substitute informality is to production in the formal sector. In order to create profits which can be appropriated, rent-seeking bureaucrats limit entry into the formal economy. As a result, firms operate in the informal sector even when the cost of informality is high, in which case lower growth emerges. However, when the cost of informality is low, a large number of firms choose to operate informally irrespective of entry conditions. In the latter case, growth is unaffected by a rent-seeking bureaucracy as entry restrictions in the formal economy do not bind.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 46 (2000)
Issue (Month): 1 (August)
Pages: 173-197

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Handle: RePEc:eee:moneco:v:46:y:2000:i:1:p:173-197
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Easterly, William & King, Robert G & Levine, Ross & Rebelo, Sérgio, 1994. "Policy, Technology Adoption and Growth," CEPR Discussion Papers 957, C.E.P.R. Discussion Papers.
  2. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  3. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  4. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
  5. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  6. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
  7. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
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