Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129943
Authors: 
Leal, Julio
Year of Publication: 
2014
Series/Report no.: 
Working Papers, Banco de México 2014-24
Abstract: 
I review a contemporary branch of the informal sector literature that focus on understanding the way firm behavior is affected by the presence of informality and how such distortions have an impact on aggregate variables. The authors in this group all make use of dynamic general equilibrium (DGE) models. I focus on models with heterogeneous firms and a cost of informality that is increasing with firm size: reducing informality entails a tradeoff because there are some distortions associated with the formal sector and some others with the informal. Quantitative evaluations of this tradeoff using these models show that, in general, reducing informality brings gains. In conclusion, substantial progress has been made in understanding informality and its consequences through the use of DGE models with heterogeneous firms. More research is needed to understand how informality affects the economy when other sources of heterogeneity are considered
Subjects: 
informality
literature survey
dynamic general equilibrium
heterogeneous firms
distortions
productivity
JEL: 
E26
O17
O40
Document Type: 
Working Paper
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