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Access to Credit and the Size of the Formal Sector in Brazil

Pablo D'Erasmo ()

No 4545, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper studies the link between credit conditions and formalization in Brazil, as both credit and the rate of formalization have notably increased in the last decade. A firm dynamics model with endogenous formal and informal sectors is developed to quanti- tatively evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in the cost of financial intermediation. The model predicts that the observed reduction in intermediation costs generates an increase in the credit-to-output ratio and in the share of formal workers, in line with the data. It is found that-by affecting the corporate interest rate, the allocation of capital and the entry and exit rates-the change in credit conditions has important effects on firm size distribution and aggregate productivity.

Keywords: IDB-WP-404; Financial Structure; Informal Sector; Productivity (search for similar items in EconPapers)
JEL-codes: D24 E26 L11 O16 (search for similar items in EconPapers)
Date: 2013-05
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