Premium
THE INFORMAL SECTOR: AN EQUILIBRIUM MODEL AND SOME EMPIRICAL EVIDENCE FROM BRAZIL
Author(s) -
DE PAULA ÁUREO,
SCHEINKMAN JOSÉ A.
Publication year - 2011
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/j.1475-4991.2011.00450.x
Subject(s) - formality , economics , informal sector , capital (architecture) , general equilibrium theory , entrepreneurship , index (typography) , production (economics) , microeconomics , sample (material) , payment , labour economics , econometrics , finance , economic growth , philosophy , linguistics , chemistry , archaeology , chromatography , world wide web , computer science , history
We test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agents' ability to manage production differs and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller, and employ a lower capital–labor ratio. The model predicts that the interaction of an index of observable inputs to entrepreneurial ability and formality is positively correlated with firm size, which we verify in the data. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.