A Structural Model of Informality with Constrained Entrepreneurship

Pierre Nguimkeu

Economic Development and Cultural Change, 2022, vol. 70, issue 3, 941 - 980

Abstract: This paper presents and estimates a partial equilibrium model of informality and entrepreneurship using data from Cameroon. The model accounts for institutional factors such as registration costs, probability of detection of informal activity, credit constraints, and taxes in the formal sector. I show that the propensity to formalize increases with skills only after a critical threshold corresponding to secondary school completion in the data. This is because high formalization costs are affordable only to the most productive entrepreneurs, who are typically those with higher skills. The estimated model is used to simulate the counterfactual impact of changes in registration costs, taxation, and enforcement, which are found to substantially affect formalization, aggregate income, and government revenues. However, none of these policies is able to reduce the size of informality to less than 20%–30%. This suggests that alternative policies beyond these standard formalization schemes should be considered to address informality in Africa.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://dx.doi.org/10.1086/713934 (application/pdf)
http://dx.doi.org/10.1086/713934 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:ecdecc:doi:10.1086/713934

Access Statistics for this article

More articles in Economic Development and Cultural Change from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().