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Informality, Corruption and Trade Reform

Author

Listed:
  • Sugata Marjit

    (City University of Hong Kong)

  • Amit K. Biswas

Abstract

Stringent regulations coupled with corruption generate and sustain extra legal or informal transactions in the developing countries. Does trade related reform discourage informal activities and corruption? This paper attempts to analyze such a phenomenon. An import competing firm allocates production between a high wage formal and a low wage informal segment. Illegal use of labour in the informal sector is characterized by a probability of punishment which depends on the size of the informal output. In such a structure, as tariff comes down, total employment contracts but the informal sector expands. However, lowering of interest rate, possibly through the liberalization of capital account, tends to reduce the size of the informal segment. Hence, trade reforms may have conflicting impact on informality and corruption.

Suggested Citation

  • Sugata Marjit & Amit K. Biswas, 2011. "Informality, Corruption and Trade Reform," Trade Working Papers 22896, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:tradew:22896
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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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