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Income Distribution and the Size of the Informal Sector

  • Diego Winkelried

    (St John's College, Cambridge)

This paper studies the role of income distribution as a determinant of the size of the informal sector in an economy by relying on a channel whereby inequality affects the behaviour of aggregate demand and thus influences the incentives a firm has to become informal. It is further postulated that income distribution affects the response of the informal sector to different fiscal policies, either demand or supply-orientated. The main findings are that high inequality leads to a large informal sector, and that redistribution towards the middle class decreases the size of the informal sector and increases the capacity of fiscal instruments to reduce informality. Empirical evidence for Mexican cities is provided.

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File URL: http://econwpa.repec.org/eps/dev/papers/0512/0512005.pdf
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Paper provided by EconWPA in its series Development and Comp Systems with number 0512005.

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Length: 26 pages
Date of creation: 06 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpdc:0512005
Note: Type of Document - pdf; pages: 26
Contact details of provider: Web page: http://econwpa.repec.org

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  17. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  18. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
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