Title
Strict Duality and Overlapping Productivity Distributions between Formal and Informal Firms
Department/School
Economics
Date
2018
Document Type
Article
Keywords
informality, competition, dual view, productivity
DOI
https://doi.org/10.1016/j.jdeveco.2018.08.011
Abstract
This paper develops a multi-industry general equilibrium model where entrepreneurs within each industry can decide to operate formally or informally. The model generates a rich set of predictions including productivity cut-offs for formal and informal firms to operate within different industries. We allow fixed costs to vary across industries, resulting in overlapping productivity distributions between formal and informal firms in the aggregate, but strict duality within industries. In doing so, we are able to generate and test predictions with regard to heterogeneity in informality across industries for the case of Indian manufacturing establishments. Consistent with the model, we find that the overlap between formal and informal establishments in the aggregate is larger than the overlaps within industries. Informality tends to decrease with average industry productivity and establishment size. Finally, more productive industries have greater overlaps in productivity between formal and informal establishments.
Volume
135
Published in
Journal of Development Economics
Citation/Other Information
Allen, J., Nataraj, S., & Schipper, T.C. (2018). Strict Duality and Overlapping Productivity Distributions between Formal and Informal Firms. Journal of Development Economics, 135, 534-554. https://doi.org/10.1016/j.jdeveco.2018.08.011