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

Author

Listed:
  • Bennett, John

    (Royal Holloway, University of London)

  • Estrin, Saul

    (London School of Economics)

Abstract

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.

Suggested Citation

  • Bennett, John & Estrin, Saul, 2007. "Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy," IZA Discussion Papers 2950, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2950
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    References listed on IDEAS

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    1. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2007. "What you export matters," Journal of Economic Growth, Springer, vol. 12(1), pages 1-25, March.
    2. 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.
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    5. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
    6. Fields,Gary S., 2005. "A guide to multisector labor market models," Policy Research Working Paper Series 32547, The World Bank.
    7. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    8. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
    9. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
    10. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," The World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
    11. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    12. 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.
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    Citations

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    Cited by:

    1. Petr Huber & Ulugbek Rahimov, 2014. "Formal and Informal Sector Wage Differences in Transition Economies: Evidence from Tajikistan," MENDELU Working Papers in Business and Economics 2014-48, Mendel University in Brno, Faculty of Business and Economics.
    2. Prodyumna Goutam & Italo A. Gutierrez & Krishna B. Kumar & Shanthi Nataraj, 2017. "Does Informal Employment Respond to Growth Opportunities? Trade-Based Evidence from Bangladesh," Working Papers WR-1198, RAND Corporation.
    3. Serge Francis Simen, 2018. "Dynamique de l'entrepreneuriat informel au Sénégal : caractéristiques et particularités," Post-Print halshs-01782037, HAL.
    4. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
    5. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
    6. Friederike Welter & David Smallbone & Anna Pobol, 2015. "Entrepreneurial activity in the informal economy: a missing piece of the entrepreneurship jigsaw puzzle," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 27(5-6), pages 292-306, June.
    7. Tilman Brück & Fernanda Llussá & José Tavares, 2010. "Perceptions, Expectations, and Entrepreneurship: The Role of Extreme Events," Discussion Papers of DIW Berlin 1093, DIW Berlin, German Institute for Economic Research.
    8. John Bennett, 2008. "Formality, Informality, and Social Welfare," CEDI Discussion Paper Series 08-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
    9. repec:hrv:faseco:33078210 is not listed on IDEAS
    10. Colin C. Williams & Sara Nadin, 2010. "Entrepreneurship And The Informal Economy: An Overview," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 15(04), pages 361-378.
    11. Joanna Tyrowicz & Stanisław Cichocki, 2011. "Employed unemployed? On shadow employment in transition," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(2), pages 259-281, May.
    12. Demirguc-Kunt, Asli & Klapper, Leora F. & Panos, Georgios A., 2009. "Entrepreneurship in post-conflict transition : the role of informality and access to finance," Policy Research Working Paper Series 4935, The World Bank.
    13. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers 2010-05, Faculty of Economic Sciences, University of Warsaw.
    14. Prodyumna Goutam & Italo A. Gutierrez & Krishna B. Kumar & Shanthi Nataraj, 2017. "Does Informal Employment Respond to Growth Opportunities? Trade-Based Evidence from Bangladesh," Working Papers 1198, RAND Corporation.

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    More about this item

    Keywords

    developing economy; entry; informal sector;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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