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What Sustains Informality? A Study of the Interactions between Formal and Informal Sector Firms

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  • Ajit Mishra

Abstract

This paper considers two vertical links between informal and formal sector firms and studies their implications. First, we model a situation where final products produced by the formal and informal sector firms are differentiated in terms of quality and consumption demand for the informal sector firm is related to the distribution of income. Less well-off consumers generate demand for the low-priced, low quality good produced by the informal sector. Our paper studies the implications of this link for the size of the informal sector. Second, we analyse a situation where, instead of competing with the formal sector firm, the informal sector firm produces an intermediate good for the other firm.

Suggested Citation

  • Ajit Mishra, 2022. "What Sustains Informality? A Study of the Interactions between Formal and Informal Sector Firms," Journal of Development Studies, Taylor & Francis Journals, vol. 58(7), pages 1403-1415, July.
    • Handle: RePEc:taf:jdevst:v:58:y:2022:i:7:p:1403-1415
    DOI: 10.1080/00220388.2022.2061853
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    Cited by:

    1. Ritu Narang & Sonal Tiwari, 2025. "Role of Modern Technology in Unorganized Retail Sector," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(1), pages 1717-1744, March.
    2. Samuel Amponsah Odei & Taiwo Temitope Lasisi & Kayode Kolawole Eluwole, 2024. "Determinants of territorial innovations in the macroregion of Visegrád countries: a seemingly unrelated probit analysis," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 44(1), pages 73-118, March.
    3. Caroline Krafft & Ragui Assaad & Khandker Wahedur Rahman & Maakwe Cumanzala, 2024. "How do small formal and informal firms in Egypt compare? An analysis of firm characteristics and implications for formalization efforts," Review of Development Economics, Wiley Blackwell, vol. 28(3), pages 1292-1315, August.
    4. Mehak Majeed & Saeed Owais Mushtaq & Zahid Gulzar Rather, 2022. "The Complementarity Between the Formal and Informal Sub-sectors of the Indian Industry," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 65(4), pages 981-1006, December.
    5. Erumban, Abdul A., 2024. "Informality and aggregate labor productivity growth: Does ICT moderate the relationship?," Telecommunications Policy, Elsevier, vol. 48(1).
    6. Rihab Bellakhal & Hend Ghazzai & Rim Lahmandi‐Ayed, 2024. "Globalisation and informality: The role of quality gap and social contributions," The World Economy, Wiley Blackwell, vol. 47(7), pages 3120-3149, July.

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