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What sustains informality?: A study of the interactions between formal- and informal-sector firms

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  • Ajit Mishra

Abstract

We consider two vertical links between informal- and formal-sector firms and study their implications. In one case, the final products produced by the formal- and informal-sector firms are vertically differentiated in terms of quality, and the size of the informal sector demand is related to the income distribution. Our paper studies the implications of this quality choice for the size of the informal sector. In the other case, the informal-sector firm produces an intermediate good as an input for the formal-sector firm.

Suggested Citation

  • Ajit Mishra, 2021. "What sustains informality?: A study of the interactions between formal- and informal-sector firms," WIDER Working Paper Series wp-2021-71, World Institute for Development Economic Research (UNU-WIDER).
    • Handle: RePEc:unu:wpaper:wp-2021-71
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    References listed on IDEAS

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    1. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2011. "Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program," Journal of Development Economics, Elsevier, vol. 94(2), pages 262-276, March.
    2. Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 109-126, Summer.
    3. Banerji, Arup & Jain, Sanjay, 2007. "Quality dualism," Journal of Development Economics, Elsevier, vol. 84(1), pages 234-250, September.
    4. Chong, Alberto & Gradstein, Mark, 2007. "Inequality and informality," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 159-179, February.
    5. Dobson, Stephen & Ramlogan-Dobson, Carlyn, 2012. "Inequality, corruption and the informal sector," Economics Letters, Elsevier, vol. 115(1), pages 104-107.
    6. repec:wbk:wbpubs:6730 is not listed on IDEAS
    7. Suresh de Mel & David McKenzie & Christopher Woodruff, 2013. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka," American Economic Journal: Applied Economics, American Economic Association, vol. 5(2), pages 122-150, April.
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    Cited by:

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    3. Caroline Krafft & Ragui Assaad & Khandker Wahedur Rahman & Maakwe Cumanzala, 2024. "How do small formal and informal firms in Egypt compare? An analysis of firm characteristics and implications for formalization efforts," Review of Development Economics, Wiley Blackwell, vol. 28(3), pages 1292-1315, August.
    4. Erumban, Abdul A., 2024. "Informality and aggregate labor productivity growth: Does ICT moderate the relationship?," Telecommunications Policy, Elsevier, vol. 48(1).
    5. Takunda Gwyneth ZARANYIKA & Newman WADESANGO, 2025. "The Effects of Zimbabwean Dollar Depreciation on Financial Performance and Profitability Metrics of Formal Retail Firms," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 6(10), pages 52-70, October.
    6. Mehak Majeed & Saeed Owais Mushtaq & Zahid Gulzar Rather, 2022. "The Complementarity Between the Formal and Informal Sub-sectors of the Indian Industry," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 65(4), pages 981-1006, December.
    7. Rihab Bellakhal & Hend Ghazzai & Rim Lahmandi‐Ayed, 2024. "Globalisation and informality: The role of quality gap and social contributions," The World Economy, Wiley Blackwell, vol. 47(7), pages 3120-3149, July.

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