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Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy

  • John Bennett

    ()

  • Saul Estrin

We model decisions with respect to formality or informality for entrepreneurs in a new industry for a developing economy. We show that informality allows a leader to explore, without significant sunk costs, the potential profitability of the industry; that is, informality may be a stepping stone, enabling an entrepreneur to experiment cheaply in an uncertain environment. There are circumstances under which, without this option, the industry would not become established. We analyse the roles of parameters such as a minimum wage rate and we show that the existence of finance constraints can actually encourage entry in this context.

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File URL: http://www.brunel.ac.uk/__data/assets/pdf_file/0005/342689/CEDI_07-11.pdf
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Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 07-11.

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Length: 44 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:edb:cedidp:07-11
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  1. Hausmann, Ricardo & Hwang, Jason & Rodrik, Dani, 2005. "What You Export Matters," Working Paper Series rwp05-063, Harvard University, John F. Kennedy School of Government.
  2. Jose Scheinkman & Aureo de Paula, 2007. "The Informal Sector," 2007 Meeting Papers 117, Society for Economic Dynamics.
  3. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  4. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  5. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December.
  6. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
  7. Arne Bigsten & Peter Kimuyu & Karl Lundvall, 2004. "What to Do with the Informal Sector?," Development Policy Review, Overseas Development Institute, vol. 22(6), pages 701-715, November.
  8. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  9. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  10. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  11. Fields, Gary S., 2005. "A guide to multisector labor market models," Social Protection Discussion Papers 32547, The World Bank.
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