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Access to Credit and the Size of the Formal Sector in Brazil

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  • D'Erasmo, Pablo N.

Abstract

This paper studies the link between credit conditions and formalization in Brazil, as both credit and the rate of formalization have notably increased in the last decade. A firm dynamics model with endogenous formal and informal sectors is developed to quanti- tatively evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in the cost of financial intermediation. The model predicts that the observed reduction in intermediation costs generates an increase in the credit-to-output ratio and in the share of formal workers, in line with the data. It is found that-by affecting the corporate interest rate, the allocation of capital and the entry and exit rates-the change in credit conditions has important effects on firm size distribution and aggregate productivity.

Suggested Citation

  • D'Erasmo, Pablo N., 2013. "Access to Credit and the Size of the Formal Sector in Brazil," IDB Publications (Working Papers) 4545, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:4545
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    More about this item

    Keywords

    IDB-WP-404; Financial Structure; Informal Sector; Productivity;
    All these keywords.

    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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