Financial structure, informality and development

Pablo D'Erasmo and Hernan Moscoso Boedo

Journal of Monetary Economics, 2012, vol. 59, issue 3, 286-302

Abstract: The impact of capital market imperfections and costs of creating and operating formal sector firms on total factor productivity is studied. We propose a firm dynamics model with endogenous formal and informal sectors where firms face a technology adoption opportunity. The model predicts that countries with a low degree of debt enforcement and high costs of formality are characterized by low allocative efficiency and large output shares produced by low productivity, informal sector firms. For frictions parametrized using the Doing Business database, the model generates a drop in total factor productivity of up to 25% relative to the US.

Date: 2012
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Related works:
Working Paper: Financial Structure, Informality and Development (2010)
Working Paper: Financial Structure, Informality and Development (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:59:y:2012:i:3:p:286-302

DOI: 10.1016/j.jmoneco.2012.03.003

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