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Informality, Governance and Growth

Author

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  • Dibyendu Maiti

    (Department of Economics, Delhi School of Economics)

  • Chandril Bhattacharyya

    (Centre for Development Studies, Kerala)

Abstract

This paper develops a growth framework of a typical developing and demarcating setting with formal and informal sectors, which faces trade-off of redistribution through either direct subsidy or strategic regulatory concession to operate informal activities. Inverted U-shaped growth and welfare functions against governance are found, which suggests a deliberated weak governance can raise growth and welfare of the economy with large informal sector keeping taxation at lower level. The governance that maximises growth varies inversely with subsidy given to informal sector and formal labour bargaining power. Unlike the level maximising welfare, the governance that maximises growth becomes independent of the bargaining power in case of no subsidy. Using standard parameters, the calibrated growth and welfare functions support these relations. Econometric results derived from instrumental and system regression models using pooled data for 46 countries during 1995-2009 justify such conjectures. This explains why the growing countries show higher level of informality.

Suggested Citation

  • Dibyendu Maiti & Chandril Bhattacharyya, 2018. "Informality, Governance and Growth," Working papers 283, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:283
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    Keywords

    informal sector; growth; strategic governance; taxation;
    All these keywords.

    JEL classification:

    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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