This paper focuses on the role of development in informality through higher wages and expanded production possibilities. First, it uses informal, plant-level survey data across countries to document that on average, richer countries have smaller informal, unregistered plants in terms of employment. This negative relationship holds even after controlling for plant-level characteristics. Then, a dynamic general equilibrium model with incomplete tax enforcement is developed such that formal and informal plants coexist in equilibrium. The model allows for two groups of agents operating in the informal sector: those with lower abilities than workers, and those with abilities falling between workers and formal managers. In the model, when plants become more productive, some agents operating informally choose to be workers and some of them transition into formality due to higher wages and better production possibilities, which decreases the mean size of informal plants. The quantitative results indicate that around 30 percent of the increase in aggregate output due to higher productivity is associated with a roughly one-quarter decline in the mean size of informal plants.
Authors
- DOI
- https://dx.doi.org/10.1596/1813-9450-10956
- Disclosure Date
- 2024/10/23
- Disclosure Status
- Disclosed
- Doc Name
- Fading Away Informality by Development
- Originating Unit
- Off of Sr VP Dev Econ/Chief Econ (DECVP)
- Pages
- 43
- Published in
- United States of America
- Series Name
- Policy Research working paper; PROSPERITY;
- Unit Owning
- Enterprise Analysis-IFC (DECEA)
- Version Type
- Final
- Volume No
- 1
Table of Contents
- Introduction 4
- Data 7
- Model 9
- Environment 9
- Properties of the Equilibrium 11
- Parameter Values 14
- Findings 16
- Accounting for Informal Mean Plant Sizes across Countries 18
- When Only Formal Managers Benefit from Development 19
- Comparing with Tax and Enforcement Policies 19
- Concluding Remarks 20
- Solving Managers' problem and the Equilibrium 40
- Solving the problem of a formal manager 40
- Solving the problem of an informal manager 40
- Equilibrium 41
- List of Countries 43
