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The Dynamics of the Informal Economy

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  • Roxana Gutiérrez-Romero

Abstract

This paper analyses the factors that give rise to the existence of the informal economy and how it evolves over time. Using an occupational-choice model the paper shows that at early stages of development, informal and formal markets coexists, but in the long-run the size of the informal economy can decline depending on the initial distribution of wealth. The model shows that the higher the initial wealth inequality the larger the size of the informal economy and the higher the wealth inequality will be in the long run. The paper calibrates the model using numerical simulations.

Suggested Citation

  • Roxana Gutiérrez-Romero, 2010. "The Dynamics of the Informal Economy," CSAE Working Paper Series 2010-07, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2010-07
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    File URL: http://www.csae.ox.ac.uk/materials/papers/2010-07text.pdf
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    Cited by:

    1. Tehmina Khan & Monazza Aslam, 2013. "Mongolia : Gender Disparities in Labor Markets and Policy Suggestions," World Bank Other Operational Studies 16500, The World Bank.

    More about this item

    Keywords

    informal economy; occupational choice and inequality;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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