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Informal Sector and Economic Growth: The Supply of Credit Channel

Baptiste Massenot () and Stephane Straub ()

No 11-254, TSE Working Papers from Toulouse School of Economics (TSE)

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 bank- ing sector or with low financial openness. When the formal sector becomes larger in those countries, more entrepreneurs become creditworthy and the higher pres- sure in the credit market increases the interest rate. This reduces future capital accumulation. We show some empirical evidence consistent with these predictions.

Date: 2011-09
New Economics Papers: this item is included in nep-ent and nep-iue
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Working Paper: Informal Sector and Economic Growth: The Supply of Credit Channel (2011) Downloads
Working Paper: Informal Sector and Economic Growth: The Supply of Credit Channel (2011) Downloads
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