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Informality, Infrastructure Investments, and New Firms’ Creation: The Location Strategy

Author

Listed:
  • João Ricardo Faria

    (Florida Atlantic University)

  • Mauricio Prado

    (Department of Economics, Copenhagen Business School)

  • João J. Ferreira

    (University of Beira Interior)

Abstract

This paper examines how government investments in infrastructure affect new firms’ creation and location. We analyze two scenarios. With an optimizing government, optimal location is a function of government expenditures in infrastructure. With a passive government, optimal location is independent of government expenditures in infrastructure. Productivity effects in the formal sector, as contrasted with informal sector, yield a greater impact on the formation of capital stock, and shadow price of location. The impact of fees on informal firms and taxes of formal firms affect output and welfare. With an optimizing government, entrepreneurs in the formal sector will have higher output and welfare; with a passive government, it is likely that the welfare of informal entrepreneurs is smaller than the one of formal entrepreneurs.

Suggested Citation

  • João Ricardo Faria & Mauricio Prado & João J. Ferreira, 2022. "Informality, Infrastructure Investments, and New Firms’ Creation: The Location Strategy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 321-331, March.
    • Handle: RePEc:spr:jknowl:v:13:y:2022:i:1:d:10.1007_s13132-021-00727-8
    DOI: 10.1007/s13132-021-00727-8
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    References listed on IDEAS

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