Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35190
Authors: 
Bennett, John
Year of Publication: 
2008
Series/Report no.: 
IZA Discussion Papers 3550
Abstract: 
An industry is modeled in which entrepreneurs, who are heterogeneous in ability, may produce formally or informally. It is shown how the formal-informal mix depends on the distribution of ability, product demand and various parameter values. The industry equilibrium is compared to one in which informality is prohibited. With relatively high product demand, the effect of entrepreneurs being free to choose informality is that consumer surplus and total employment are reduced, but profit is redistributed towards more able entrepreneurs. With relatively low product demand the opposite effects obtain. We also show that informality may be a built-in stabilizer or destabilizer.
Subjects: 
Formality
informality
social welfare
JEL: 
O17
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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