Efficient informal trade: Theory and experimental evidence from the Cape Town taxi market

Niklas Bengtsson

Journal of Development Economics, 2015, vol. 115, issue C, 85-98

Abstract: Informal sectors in developing countries are often thought of as responses to rigid and cumbersome market regulations. In this paper I study informal trade as a first-best outcome. In the model I propose rigid regulations can be necessary to achieve efficiency even though they are always sidestepped. The key assumption is that the regulations define the trading parties' fall-back position in case the informal bargaining process breaks down. I set up a field experiment to test the model's mechanisms in the Cape Town market for metered taxis. Consistent with the model, I find that sidestepping the regulations increase cost efficiency (taxis take the shortest route). The price is however unaffected, suggesting informal bargaining leads to a Pareto improvement.

Keywords: Informal sector; Market regulations; Taxi experiment; Incomplete contracts; Transaction costs; Institutions; Natural field experiment; Environmental economics (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:115:y:2015:i:c:p:85-98

DOI: 10.1016/j.jdeveco.2015.02.003

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