Informal Sector Misallocation

Bernabe Lopez-Martin

No 2016-09, Working Papers from Banco de México

Abstract: A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate TFP and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.

Keywords: informal sector; misallocation; aggregate productivity; financial constraints; size-dependent taxes (search for similar items in EconPapers)
JEL-codes: E26 L11 O11 O17 O40 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-bec, nep-ger, nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: INFORMAL SECTOR MISALLOCATION (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2016-09

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