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Financial Structure, Informality and Development

  • Hernan J Moscoso Boedo

    ()

  • Pablo N D’Erasmo

    ()

This is a theory of total factor productivity based on measured capital market im- perfections and costs of creating and operating formal sector firms. We develop a firm dynamics model with endogenous formal and informal sectors where firms face a technol- ogy adoption opportunity. 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 large share output produced by low productivity firms in the informal sector. We find that this mechanism is quantitatively important. When frictions are parameterized using the World Bank Doing Business database, the model explains up to 60% of total factor productivity differences between the US and developing economies.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap374.pdf
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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 374.

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Length: 36 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:vir:virpap:374
Contact details of provider: Web page: http://www.virginia.edu/economics/home.html

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  18. Shleifer, Andrei & McLiesh, Caralee & Hart, Oliver & Djankov, Simeon, 2008. "Debt Enforcement Around the World," Scholarly Articles 2961825, Harvard University Department of Economics.
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  33. Hernan J. Moscoso Boedo & Toshihiko Mukoyama, 2011. "Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences," Virginia Economics Online Papers 379, University of Virginia, Department of Economics.
  34. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does it pay firms to register for taxes ? the impact of formality on firm profitability," Policy Research Working Paper Series 4449, The World Bank.
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