Climate change and technology adoption with a large informal sector

Miguel Mascarúa and Ricardo Montañez-Enríquez

Latin American Journal of Central Banking (previously Monetaria), 2025, vol. 6, issue 3

Abstract: What are the aggregate consequences of policies that target adopting more efficient technologies in an economy with a large informal sector? Using a heterogeneous agents model with endogenous occupation choice between workers and formal and informal entrepreneurs and calibrated to Mexico, we found that in economies with a large informal sector, a decrease in the overall tax rate increases by more the adoption of advanced technologies than in economies with a low informal sector. Furthermore, the burden on government revenues is lower in a highly informal economy. In addition, we find that such policies are more efficient than those that target adopting more advanced technologies because they tackle two distortionary problems: the informality rate and the low adoption of advanced technologies. Such policies become relevant, as we estimate that climate change can reduce aggregate production by up to 6.6% in the long-run.

Keywords: Informality; Heterogeneous producers; Technology adoption; Climate change (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:lajcba:v:6:y:2025:i:3:s2666143824000292

DOI: 10.1016/j.latcb.2024.100147

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