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The informal sector as a substitute for social security

  • Kolmar, Martin
  • Marjit, Sugata

We consider an economy with two groups of individuals, rich and poor. A central authority can either directly redistribute income to the poor, or allow for some degree of informality in economic activities by not enforcing property rights. The optimal degree of informality depends upon the characteristics of the resources used by the poor if property rights are not perfectly enforced. It is shown that the degree of enforcement falls if the resource is becoming less rivalrous in use. Hence, the informal sector is a better substitute for social security, the more the resources used by the informal sector have the character of public goods. We explore the basic trade-offs and discuss the special cases of anarchy, perfect civil society and the absence of a welfare state. In addition to this we analyze the similarities and differences between a welfare-maximizing state and a predatory state.

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Paper provided by University of Konstanz, Department of Economics in its series Discussion Papers, Series I with number 316.

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Date of creation: 2002
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Handle: RePEc:zbw:kondp1:316
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  1. Marjit, Sugata & Shi, Heling, 1998. "On controlling crime with corrupt officials," Journal of Economic Behavior & Organization, Elsevier, vol. 34(1), pages 163-172, January.
  2. Bush, Winston C. & Mayer, Lawrence S., 1974. "Some implications of anarchy for the distribution of property," Journal of Economic Theory, Elsevier, vol. 8(4), pages 401-412, August.
  3. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  4. Marjit, Sugata & Rajeev, Meenakshi & Mukherjee, Diganta, 2000. "Incomplete information as a deterrent to crime," European Journal of Political Economy, Elsevier, vol. 16(4), pages 763-773, November.
  5. Marjit, Sugata & Mukherjee, Vivekananda & Mukherjee, Arijit, 2000. "Harassment, corruption and tax policy," European Journal of Political Economy, Elsevier, vol. 16(1), pages 75-94, March.
  6. Skaperdas, S., 1991. "Cooperation, Conflict And Power In The Absence Of Property Rights," Papers 90-91-06a, California Irvine - School of Social Sciences.
  7. Herschel I. Grossman & Minseong Kim, 1996. "Inequality, Predation and Welfare," NBER Working Papers 5704, National Bureau of Economic Research, Inc.
  8. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
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