Informal Sector and Economic Growth: The Supply of Credit Channel

Baptiste Massenot () and Stephane Straub

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: A standard view holds that removing barriers to entry and improving judicial enforcement would reduce informality and boost investment and growth. We show, however, that this conclusion may not hold in countries with a concentrated banking sector or with low financial openness. When the formal sector becomes larger in those countries, more entrepreneurs become creditworthy and the higher pressure in the credit market increases the interest rate. This reduces future capital accumulation. We show some empirical evidence consistent with these predictions.

Keywords: informal sector; barriers to entry; credit market; enforcement; financial openness (search for similar items in EconPapers)
JEL-codes: O17 (search for similar items in EconPapers)
Pages: 20 pp. + figures and tables
Date: 2011-09
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Informal Sector and Economic Growth: The Supply of Credit Channel (2011)
Working Paper: Informal Sector and Economic Growth: The Supply of Credit Channel (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:12.03

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