Formal and informal markets: A strategic and evolutionary perspective
We investigate the coexistence of formal and informal markets. In formal markets, we assume sellers can publicly advertise their prices and locations, whereas in informal markets, sellers need to trade through bilateral bargaining so as to remain anonymous from the taxing authority. We consider two models. As a benchmark, we first only allow sellers to switch between markets, which enables us to derive some analytical results that show the existence of a stable equilibrium where formal and informal markets coexist. We also establish that some sellers will migrate from the formal market to the informal market if the formal market's advantage in quality assurance erodes, or the government imposes higher taxes and regulations in the formal market, or the risk of crime and/or confiscation decreases in the informal market, or the number of buyers in the informal market increases. Some sellers will migrate from the informal market to the formal market whenever the opposite changes occur. We then allow both sellers and buyers to switch between markets. In this model, we illustrate that if the net costs of trading for sellers in the formal sector and buyers in the informal sector have opposite signs, then there is a unique locally stable equilibrium where formal and informal markets coexist.
|Date of creation:||07 Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Camera, Gabriele & Delacroix, Alain, 2003.
"Trade Mechanism Selection in Markets with Frictions,"
Purdue University Economics Working Papers
1166, Purdue University, Department of Economics.
- Gabriele Camera & Alain Delacroix, 2004. "Trade Mechanism Selection in Markets with Frictions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 851-868, October.
- Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
- Friedrich Schneider & Dominik Enste, 1999.
"Shadow Economies Around the World - Size, Causes, and Consequences,"
CESifo Working Paper Series
196, CESifo Group Munich.
- Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World; Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
- Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.
- David E. A. Giles & Gugsa T. Werkneh & Betty J. Johnson, 1999.
"Asymmetric Responses of the Underground Economy to Tax Changes: Evidence From New Zealand Data,"
Econometrics Working Papers
9911, Department of Economics, University of Victoria.
- Giles, David E A & Werkneh, Gugsa T & Johnson, Betty J, 2001. "Asymmetric Responses of the Underground Economy to Tax Changes: Evidence from New Zealand Data," The Economic Record, The Economic Society of Australia, vol. 77(237), pages 148-59, June.
- Erwan Quintin, 2008. "Contract enforcement and the size of the informal economy," Economic Theory, Springer, vol. 37(3), pages 395-416, December.
- Gomis-Porqueras, Pedro & Peralta-Alva, Adrian & Waller, Christopher, 2014. "The shadow economy as an equilibrium outcome," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 1-19.
- Kyle Bagwell, 2005.
"The Economic Analysis of Advertising,"
0506-01, Columbia University, Department of Economics.
- Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
- 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.
- Michelacci, Claudio & Suarez, Javier, 2002.
"Incomplete Wage Posting,"
CEPR Discussion Papers
3658, C.E.P.R. Discussion Papers.
- 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.
- Hernan Moscoso Boedo & Pablo D'Erasmo, 2010.
"Financial Structure, Informality and Development,"
2010 Meeting Papers
319, Society for Economic Dynamics.
- Wang, David Han-Min & Yu, Tiffany Hui-Kuang & Hu, Heng-Chang, 2012. "On the asymmetric relationship between the size of the underground economy and the change in effective tax rate in Taiwan," Economics Letters, Elsevier, vol. 117(1), pages 340-343.
- Christopoulos, Dimitris K., 2003. "Does underground economy respond symmetrically to tax changes? Evidence from Greece," Economic Modelling, Elsevier, vol. 20(3), pages 563-570, May.
- S. Boragan Aruoba, 2010. "Informal Sector, Government Policy and Institutions," 2010 Meeting Papers 324, Society for Economic Dynamics.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:42513. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.