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Informal firms in developing countries: entrepreneurial stepping stone or consolation prize?

  • John Bennett

    ()

We analyse potential dynamic benefits for a firm from having the option of adopting informal status. Informality may be a stepping stone, without which formality might never be achieved. This result obtains for a broad range of realistic parameter values, suggesting a potential dynamic case for government support of informal firms. Informality may alternatively play a converse role as a consolation prize, a firm only entering an industry (formally) because it recognizes that if profitability is disappointing, it can switch to informality. However, this result obtains for a range of parameter values so narrow to be of no practical significance.

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File URL: http://hdl.handle.net/10.1007/s11187-009-9194-6
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Article provided by Springer in its journal Small Business Economics.

Volume (Year): 34 (2010)
Issue (Month): 1 (January)
Pages: 53-63

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Handle: RePEc:kap:sbusec:v:34:y:2010:i:1:p:53-63
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  1. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
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  10. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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  13. 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.
  14. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
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  16. Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper 99-07, Federal Reserve Bank of Richmond.
  17. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
  18. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
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