The Informal Sector: An Equilibrium Model and Some Empirical Evidence from Brazil

Aureo de Paula and Jose Scheinkman

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agent's ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller and employ a lower capital-labor ratio. When education is an imperfect proxy for ability, the model predicts that the interaction of the manager's education and formality is positively correlated with firm size. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.

Keywords: Informal Sector; Tax Avoidance; Brazil (search for similar items in EconPapers)
JEL-codes: H2 H3 K4 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-12-02
New Economics Papers: this item is included in nep-dev, nep-ent and nep-pbe
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: THE INFORMAL SECTOR: AN EQUILIBRIUM MODEL AND SOME EMPIRICAL EVIDENCE FROM BRAZIL (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:09-044

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