Premium
INFORMAL SECTOR AND ECONOMIC DEVELOPMENT: THE CREDIT SUPPLY CHANNEL
Author(s) -
Massenot Baptiste,
Straub Stéphane
Publication year - 2016
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12301
Subject(s) - economics , openness to experience , enforcement , investment (military) , general equilibrium theory , monetary economics , bond market , capital (architecture) , empirical evidence , bank credit , international economics , macroeconomics , psychology , social psychology , history , archaeology , politics , political science , law , philosophy , epistemology
The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions. ( JEL O16, O43, E26)