Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy

Marcelo Arbex, Marcio V. Correa () and Marcos R. V. Magalhaes ()
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Marcio V. Correa: CAEN - Graduate Studies in Economics, Federal University of Ceara
Marcos R. V. Magalhaes: CAEN - Graduate Studies in Economics, Federal University of Ceara

No 2004, Working Papers from University of Windsor, Department of Economics

Abstract: We study an equilibrium occupational choice model where heterogeneous agents decide to become either workers or entrepreneurs in the formal or informal sector. Informal output is subjected to taxation determined by a combination of managers capital choice and the society's tolerance of informality. The model is consistent with empirical evidence for the Brazilian informal sector. The counterfactual analysis shows substantial heterogeneity of policy effects on occupational choices (entrepreneur-worker) and within the entrepreneurial choices (formal-informal). Changes in the society's tolerance of informality lead agents to shift between the two entrepreneurial choices rather than in the entrepreneur-worker dimension.

Keywords: Informal Sector; Social Norms; Credit Constraints; Limited Enforcement (search for similar items in EconPapers)
JEL-codes: E26 E6 H26 O11 O17 Z13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2020-07
New Economics Papers: this item is included in nep-ent, nep-iue and nep-mac
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Journal Article: Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy (2023)
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