The informal sector in contemporary models of the aggregate economy

Arbeitspapier

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

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Papers ; No. 2014-24

Classification and Topics

• Classification: Wirtschaft ; Informal Economy; Underground Economy ; Formal and Informal Sectors; Shadow Economy; Institutional Arrangements ; Economic Growth and Aggregate Productivity: General
• Subject: informality ; literature survey ; dynamic general equilibrium ; heterogeneous firms ; distortions ; productivity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leal, Julio
• Event: Veröffentlichung
• (who): Banco de México
• (where): Ciudad de México
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/129943
• Last update: 10.03.2025, 11:45 AM CET