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Informal Sector, Innovation and Growth

Author

Listed:
  • Chandril Bhattacharyya

    (Centre for Development Studies Kerala)

  • Dibyendu Maiti

    (Department of Economics, Delhi School of Economics)

Abstract

This paper applies the endogenous growth model with R&D in the presence of the informal sector. It establishes the existence of formal and informal sectors at the steady state, where the formal sector only can buy patented intermediate varieties. The patent for a finite period reduces the incentive to invest in R&D, thereby reducing growth. It further shows that the steady-state growth rate depends on the share of formal employment and vice versa. However, the extent to which the economy would grow depends on various country-specific factors, production-related characteristics and the cost of accessing production activities in the informal sector. As a country develops, we found that a drop in substitutability between formal and informal goods and a rise in formal wage rent with the development reduce the share of formal employment and growth rate. In contrast, improved formal productivity increases them. They together may produce a non-monotonic shape of growth and formal employment share with the level of development. JEL Codes: E26, O11 Key words: Informal Sector, R&D, Patent length, growth

Suggested Citation

  • Chandril Bhattacharyya & Dibyendu Maiti, 2023. "Informal Sector, Innovation and Growth," Working papers 334, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:334
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    More about this item

    Keywords

    informal sector; r&d; patent length; growth;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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