Public financing with financial frictions and underground economy

Andres Erosa, Luisa Fuster and Tomas Martinez

Journal of Monetary Economics, 2023, vol. 135, issue C, 20-36

Abstract: What are the aggregate effects of informality in a financially constrained economy? We develop and calibrate an entrepreneurship model to data on matched employer-employee from both formal and informal sectors in Brazil. The model distinguishes between informality on the business side and the hiring of informal workers by formal businesses. Policies that reduce business informality increase aggregate output by 10.8%, TFP by 6.6%, and tax revenue by 33.2%. On the contrary, output and TFP decrease when policies reduce the intensive margin of informality, underscoring that the informal economy can play a positive role in an economy with financial frictions.

Keywords: Occupational choice; Informality; Financial frictions; Public finance (search for similar items in EconPapers)
JEL-codes: E22 E26 H20 H55 L26 O16 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:135:y:2023:i:c:p:20-36

DOI: 10.1016/j.jmoneco.2022.12.004

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