The economics of the informal sector : a simple model and some empirical evidence from Latin America
The author presents the view that informal economies arise when governments impose excessive taxes and regulations that they are unable to enforce. The author studies the determinants and effects of the informal sector using an endogenous growth model whose production technology depends essentially on congestable public services. In this model, changes (in both policy parameters and the quality of government institutions) that promote an increase in the relative size of the informal economy will also generate areduction in the rate of economic growth. Using data from Latin American countries in the early 1990's, the author tests some of the model's implications and estimates the informal sector's size in these countries --identifying the size of the informal sector to latent variables for which multiple causes and indicators exist. The results suggest that: the size of the informal sector depends positively on proxies for tax burden and restrictions on the labor market; it depends negatively on a proxy for the quality of government institutions; and an increase in the size of the informal sector hurts growth by reducing the availability of public services for everyone in the economy, and by increasing the number of activities that use some existing pubic services less efficiently or not at all.
|Date of creation:||28 Feb 1997|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
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.:
- Barro, Robert J. & Sala-i-Martin, Xavier, 1992.
"Public Finance in Models of Economic Growth,"
CEPR Discussion Papers
630, C.E.P.R. Discussion Papers.
- Mazumdar, Dipak, 1976. "The urban informal sector," World Development, Elsevier, vol. 4(8), pages 655-679, August.
- Sergio Rebelo, 1999.
"Long Run Policy Analysis and Long Run Growth,"
Levine's Working Paper Archive
2114, David K. Levine.
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-1037, October.
- Robert J. Barro, 2012.
"Inflation and Economic Growth,"
CEMA Working Papers
568, China Economics and Management Academy, Central University of Finance and Economics.
- Barro, R.J., 1988.
"Government Spending In A Simple Model Of Endogenous Growth,"
RCER Working Papers
130, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
- Xavier Sala-i-Martin, 1995.
"Transfers, social safety nets and economic growth,"
Economics Working Papers
139, Department of Economics and Business, Universitat Pompeu Fabra.
- Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
- Braun, Juan & Loayza, Norman V., 1994. "Taxation, public services, and the informal sector in a model of endogenous growth," Policy Research Working Paper Series 1334, The World Bank.
- Parthasarathi Shome, 1992. "Trends and Future Directions in Tax Policy Reform; A Latin American Perspective," IMF Working Papers 92/43, International Monetary Fund.
- anonymous, 1995. "Does the bouncing ball lead to economic growth?," Regional Update, Federal Reserve Bank of Atlanta, issue Jul, pages 1-2, 4-6.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
- Gupta, Manash Ranjan, 1993. "Rural-urban migation, informal sector and development policies A theoretical analysis," Journal of Development Economics, Elsevier, vol. 41(1), pages 137-151, June.
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
- Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
- Chaudhuri, Tamal Datta, 1989. "A theoretical analysis of the informal sector," World Development, Elsevier, vol. 17(3), pages 351-355, March.
- Kenneth Bollen, 1986. "Sample size and bentler and Bonett's nonnormed fit index," Psychometrika, Springer;The Psychometric Society, vol. 51(3), pages 375-377, September.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1727. 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: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.