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Misallocation, Informality and Human Capital

  • Hernan J Moscoso Boedo

    (University of Virginia)

  • Asli Senkal

    (University of Virginia)

  • Pablo D'Erasmo

    (University of Maryland)

We develop a theory of total factor productivity with heterogeneous firms, to explain differences in human capital across countries. In our model, firms operate in an economy with capital markets imperfections and costs of creating and operating in the formal sector. These distortions give rise to endogenous formal and informal sectors. Formal firms have a larger set of production opportunities but informal firms can avoid the costs of formalization. The model predicts that countries with a low degree of debt enforcement and high costs of formality are characterized by low allocative efficiency and a larger informal sector, lower TFP and lower human capital accumulation. We find that this mechanism is important in generating the skill distribution observed in developing countries.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 881.

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Date of creation: 2011
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Handle: RePEc:red:sed011:881
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  1. Miriam Bruhn, 2011. "License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February.
  2. Arellano, Cristina & Bai, Yan & Zhang, Jing, 2012. "Firm dynamics and financial development," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 533-549.
  3. Yongseok Shin & Joe Kaboski & Francisco J. Buera, 2008. "Finance and Development: A Tale of Two Sectors," 2008 Meeting Papers 955, Society for Economic Dynamics.
  4. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2008. "Plant-Size Distribution and Cross-Country Income Differences," NBER Working Papers 14060, National Bureau of Economic Research, Inc.
  5. Hernan J Moscoso Boedo & Pablo N D’Erasmo, 2009. "Financial Structure, Informality and Development," Virginia Economics Online Papers 374, University of Virginia, Department of Economics.
  6. Riccardo DiCecio & Levon Barseghayn, 2009. "Entry Costs, Misallocation, and Cross-Country Income and TFP Differences," 2009 Meeting Papers 428, Society for Economic Dynamics.
  7. Hernan Moscoso Boedo & Toshihiko Mukoyama, 2012. "Evaluating the effects of entry regulations and firing costs on international income differences," Journal of Economic Growth, Springer, vol. 17(2), pages 143-170, June.
  8. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  9. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730.
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