Informal Sector, Innovation and Growth

Chandril Bhattacharyya and Dibyendu Maiti ()
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Chandril Bhattacharyya: Centre for Development Studies Kerala

No 334, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper applies the endogenous growth model with R&D in the presence of the informal sector. It establishes the existence of formal and informal sectors at the steady state, where the formal sector only can buy patented intermediate varieties. The patent for a finite period reduces the incentive to invest in R&D, thereby reducing growth. It further shows that the steady-state growth rate depends on the share of formal employment and vice versa. However, the extent to which the economy would grow depends on various country-specific factors, production-related characteristics and the cost of accessing production activities in the informal sector. As a country develops, we found that a drop in substitutability between formal and informal goods and a rise in formal wage rent with the development reduce the share of formal employment and growth rate. In contrast, improved formal productivity increases them. They together may produce a non-monotonic shape of growth and formal employment share with the level of development. JEL Codes: E26, O11 Key words: Informal Sector, R&D, Patent length, growth

Pages: 35 pages
Date: 2023-03
New Economics Papers: this item is included in nep-des, nep-gro, nep-ino, nep-iue and nep-mac
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