Strict Duality and Overlapping Productivity Distributions between Formal and Informal Firms

Schipper, Tyler C.; Allen, Jeffrey; Nataraj, Shanthi

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Acceso Abierto

Strict Duality and Overlapping Productivity Distributions between Formal and Informal Firms

http://repository.urosario.edu.co/handle/10336/18254

Autores

Schipper, Tyler C.

Allen, Jeffrey

Nataraj, Shanthi

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2018-05-28

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Abstract

This paper develops a multi-industry general equilibrium model where en-trepreneurs within each industry can decide to operate formally or informally.The model yields a rich set of predictions about how firms interact in the econ-omy. It reconciles the seeming contradiction between the canonical model ofstrict productivity dualism and the empirical literature that shows an aggre-gate overlap in productivity across the formal and informal sectors. We showthat this “contradiction” is a natural outcome of fixed costs varying acrossindustries. Our model is consistent with a set of stylized fact derived fromWorld Bank Enterprise Surveys. They show that 51% of formal firms reportcompeting with informal firms. Competition decreases with a country’s de-velopment, and larger firms face less competition from informal firms. Thesefacts, in tandem with out model, highlight the complexity of informality indeveloping countries.