The informal sector in contemporary models of the aggregate economy

Leal-Ordoñez Julio C.
Authors registered in the RePEc Author Service: Julio César Leal Ordóñez

No 2014-24, Working Papers from Banco de México

Abstract: I review a contemporary branch of the informal sector literature that focus on understanding the way firm behavior is affected by the presence of informality and how such distortions have an impact on aggregate variables. The authors in this group all make use of dynamic general equilibrium (DGE) models. I focus on models with heterogeneous firms and a cost of informality that is increasing with firm size: reducing informality entails a tradeoff because there are some distortions associated with the formal sector and some others with the informal. Quantitative evaluations of this tradeoff using these models show that, in general, reducing informality brings gains. In conclusion, substantial progress has been made in understanding informality and its consequences through the use of DGE models with heterogeneous firms. More research is needed to understand how informality affects the economy when other sources of heterogeneity are considered.

Keywords: informality; literature survey; dynamic general equilibrium; heterogeneous firms; distortions; productivity (search for similar items in EconPapers)
JEL-codes: E26 O17 O40 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-bec, nep-dge, nep-iue and nep-mac
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