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Access to credit and the size of the formal sector

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  • D’Erasmo, Pablo N.

Abstract

This paper studies the link between credit conditions and formalization in Brazil. Over the last decade, Brazil has experienced a large increase in the level of credit and the rate of formalization. these changes are linked to a reduction in the cost of credit and policy reforms oriented toward improving the efficiency of the financial sector. The paper develops a model with endogenous formal and informal sectors to evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in financial intermediation costs. The model predicts that the reduction in intermediation costs generates an increase in the credit-to-output ratio and the fraction of formal workers, in line with the data. By affecting the allocation of capital and the entry and exit rates, the change in credit conditions has important implications for the firm size distribution and aggregate productivity.

Suggested Citation

  • D’Erasmo, Pablo N., 2016. "Access to credit and the size of the formal sector," LSE Research Online Documents on Economics 123168, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123168
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    File URL: http://eprints.lse.ac.uk/123168/
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    References listed on IDEAS

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    More about this item

    Keywords

    financial structure; informal sector; aggregate productivity;
    All these keywords.

    JEL classification:

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

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