Income Distribution and the Size of the Informal Sector

Diego Winkelried

Development and Comp Systems from University Library of Munich, Germany

Abstract: This paper studies the role of income distribution as a determinant of the size of the informal sector in an economy by relying on a channel whereby inequality affects the behaviour of aggregate demand and thus influences the incentives a firm has to become informal. It is further postulated that income distribution affects the response of the informal sector to different fiscal policies, either demand or supply-orientated. The main findings are that high inequality leads to a large informal sector, and that redistribution towards the middle class decreases the size of the informal sector and increases the capacity of fiscal instruments to reduce informality. Empirical evidence for Mexican cities is provided.

Keywords: Income distribution; market size; informal sector. (search for similar items in EconPapers)
JEL-codes: D31 O11 O17 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005-12-06
New Economics Papers: this item is included in nep-dev
Note: Type of Document - pdf; pages: 26
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpdc:0512005

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