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Informal Sector Misallocation

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  • López-Martín Bernabé

Abstract

A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate TFP and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.

Suggested Citation

  • López-Martín Bernabé, 2016. "Informal Sector Misallocation," Working Papers 2016-09, Banco de México.
  • Handle: RePEc:bdm:wpaper:2016-09
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    File URL: http://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7BD3A0E662-ADBB-1AE8-AB26-CDCF97AA6F24%7D.pdf
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    Cited by:

    1. Gustavo Leyva & Carlos Urrutia, 2018. "Informality, Labor Regulation, and the Business Cycle," 2018 Meeting Papers 587, Society for Economic Dynamics.
    2. repec:eee:jmacro:v:55:y:2018:i:c:p:96-116 is not listed on IDEAS

    More about this item

    Keywords

    informal sector; misallocation; aggregate productivity; financial constraints; size-dependent taxes.;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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