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Formality, Informality, and Social Welfare

  • John Bennett

    ()

An industry is modeled in which entrepreneurs, who are heterogeneous in ability, may produce formally or informally. It is shown how the formalinformal mix depends on the distribution of ability, product demand and various parameter values. The industry equilibrium is compared to one in which informality is prohibited. With relatively high product demand, the effect of entrepreneurs being free to choose informality is that consumer surplus and total employment are reduced, but profit is redistributed towards more able entrepreneurs. With relatively low product demand the opposite effects obtain. We also show that informality may be a built-in stabilizer or destabilizer.

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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 08-06.

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Length: 39 pages
Date of creation: Jun 2008
Handle: RePEc:edb:cedidp:08-06
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  1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  2. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability," IZA Discussion Papers 3179, Institute for the Study of Labor (IZA).
  3. Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
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  5. Stephane Straub, 2005. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
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  7. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  8. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
  9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  10. Francis Teal, 1995. "The size and sources of economic rents in a developing country manufacturing labour market," CSAE Working Paper Series 1995-06, Centre for the Study of African Economies, University of Oxford.
  11. Paul Collier & Jan Willem Gunning, 1997. "Explaining African economic performance," CSAE Working Paper Series 1997-02.2, Centre for the Study of African Economies, University of Oxford.
  12. Parker,Simon C., 2006. "The Economics of Self-Employment and Entrepreneurship," Cambridge Books, Cambridge University Press, number 9780521030632, October.
  13. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
  14. John Bennett & Saul Estrin, 2007. "Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy," CEDI Discussion Paper Series 07-11, Centre for Economic Development and Institutions(CEDI), Brunel University.
  15. Mariano Bosch, 2006. "Job Creation and Job Destruction in the Presence of Informal Labour Markets," CEP Discussion Papers dp0761, Centre for Economic Performance, LSE.
  16. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
  17. Eliana La Ferrara, 2003. "Kin Groups and Reciprocity: A Model of Credit Transactions in Ghana," American Economic Review, American Economic Association, vol. 93(5), pages 1730-1751, December.
  18. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
  19. Bigsten, Arne & Soderbom, Mans, 2005. "What have we learned from a decade of manufacturing enterprise surveys in Africa ?," Policy Research Working Paper Series 3798, The World Bank.
  20. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
  21. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  22. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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