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Financial structure, informality and development

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  • D'Erasmo, Pablo N.
  • Moscoso Boedo, Hernan J.

Abstract

The impact of capital market imperfections and costs of creating and operating formal sector firms on total factor productivity is studied. We propose a firm dynamics model with endogenous formal and informal sectors where firms face a technology adoption opportunity. The model predicts that countries with a low degree of debt enforcement and high costs of formality are characterized by low allocative efficiency and large output shares produced by low productivity, informal sector firms. For frictions parametrized using the Doing Business database, the model generates a drop in total factor productivity of up to 25% relative to the US.

Suggested Citation

  • D'Erasmo, Pablo N. & Moscoso Boedo, Hernan J., 2012. "Financial structure, informality and development," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 286-302.
    • Handle: RePEc:eee:moneco:v:59:y:2012:i:3:p:286-302
    DOI: 10.1016/j.jmoneco.2012.03.003
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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