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Informal sector, regulatory compliance, and leakage

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  • Baksi, Soham
  • Bose, Pinaki

Abstract

The paper models a vertically related formal and informal sector, and endogenizes the size and regulatory compliance status of the informal sector. When the formal sector can circumvent costly regulations by outsourcing polluting intermediate goods from the informal sector, stricter regulations increase (when the “composition effect” of regulation dominates its “scale effect”) or decrease total pollution, and may even have a non-monotonic impact. We identify conditions under which a partially compliant informal sector acts as a source of leakage, and examine implications for optimal enforcement policy. Further, we show that price discrimination by the formal sector, when it purchases the intermediate goods from the informal sector, can worsen regulatory compliance by the informal sector and lead to more pollution.

Suggested Citation

  • Baksi, Soham & Bose, Pinaki, 2016. "Informal sector, regulatory compliance, and leakage," Journal of Development Economics, Elsevier, vol. 121(C), pages 166-176.
    • Handle: RePEc:eee:deveco:v:121:y:2016:i:c:p:166-176
    DOI: 10.1016/j.jdeveco.2016.03.008
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    7. Saibal KAR & Biswajit MANDAL & Sugata MARJIT & Vivekananda MUKHERJEE, 2020. "Seeking Rent In The Informal Sector," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 91(1), pages 151-164, March.
    8. Chen, Rushi & Howley, Peter & Kesidou, Effie, 2024. "The impact of ETS on productivity in developing economies: A micro-econometric evaluation with Chinese firm-level data," Energy Economics, Elsevier, vol. 131(C).
    9. Jiafeng Gu, 2024. "Peer influence, market power, and enterprises' green innovation: Evidence from Chinese listed firms," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 108-121, January.
    10. Prasun Bhattacharjee & Biswajit Mandal & Ravi Radhakrishnan, 2022. "Informal input sector and its impact on output market competitiveness," Indian Economic Review, Springer, vol. 57(2), pages 553-564, December.
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