Economic Reforms, Governance and the Informal Sector

Sugata Marjit and Amit K. Biswas

No 331254, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: An import competing firm allocates production between a high wage formal and a low wage informal segment. Illegal use of labour in the informal sector is characterized by a probability of punishment which depends on the size of informal employment. In such a structure, as tariff comes down, total employment contracts but the informal sector expands. Once we bring in working capital, lowering of interest rate, again an indicator of reformatory policies, tends to reduce the size of the informal segment. Our theoretical result matches with a recent empirical evidence on the response of the informal sector to trade liberalization.

Keywords: Production Economics; Labor and Human Capital (search for similar items in EconPapers)
Pages: 16
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331254

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