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Strict Duality and Overlapping Productivity Distributions between Formal and Informal Firms

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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.
Palabras clave
Informalidad , Competencia , Vista doble , Productividad
Keywords
Informality , Competition , Dual view , Productivity
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