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Good And Bad Equilibria With The Informal Sector

  • Bouwe Dijkstra
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    We examine whether an economy can have a bad (small or no formal sector, high taxes) as well as a good (small or no informal sector, low taxes) equilibrium. When the government maximizes instantaneous formal sector welfare, this can occur if the elasticity of average to marginal cost for the public good is less than one. More regard for the informal sector leads to a worse equilibrium, and a higher prevalence of multiple equilibria.

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    File URL: http://www.nottingham.ac.uk/economics/documents/discussion-papers/06-01.pdf
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    Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 06/01.

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    Handle: RePEc:not:notecp:06/01
    Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
    Phone: (44) 0115 951 5620
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    Web page: http://www.nottingham.ac.uk/economics/

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