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Informality among multi-product firms

Listed author(s):
  • Becker, Dennis
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    This paper introduces product-level regulation as a new driver of informality and diversification in a model of heterogeneous multi-product firms and endogenous product choice. Firms face regulations at both the firm- and product-level and may comply with or evade either regulation. The model suggests that firm-level regulation directly causes informality by deterring firm registration. However, the product-level regulation has two effects: it directly drives product informality as evasion of product regulation leading to informality within the formal sector and indirectly deters firms from registering. Further, I demonstrate that the Gini coefficient and Herfindahl index can be implemented in multi-product firm models as revenue-based measures of product diversification. Contrary to the prediction of the commonly used product scope, the revenue-based measures indicate informal firms to be more diversified than formal firms.

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    File URL: http://purl.umn.edu/250009
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    Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 250009.

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    Date of creation: Nov 2014
    Handle: RePEc:ags:cudawp:250009
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