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Informal Sector: The Credit Market Channel

Stephane Straub ()

ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh

Abstract: We build a model of firms' choice between formality and informality. Complying with costly registration procedures allows the firms to benefit from key public goods, enforcement of property rights and contracts, that make the participation in the formal credit market possible. In a moral hazard framework with credit rationing, their decision is shaped by the interaction between the cost of entry into formality, and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements. The model is consistent with existing stylized facts on the determinants of informality.

Keywords: formal and informal sectors; credit markets; institutional arrangements (search for similar items in EconPapers)
JEL-codes: D2 G2 O17 (search for similar items in EconPapers)
Pages: 31
Date: 2005-04
New Economics Papers: this item is included in nep-mfd
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