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Beliefs and selection in formal and informal labor markets: an experiment

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  • Romero, Steffanny
  • Mantilla, Cesar

Abstract

We create a dual labor market in the laboratory with participants selecting where to perform a real effort task: one with higher piece-rate and taxed labor income, resembling a formal market; or another without tax contributions, resembling an informal one. Although the tax revenue is divided among all participants, regardless of their chosen market, our parameterization yields two coordination equilibria. We thus explore whether feedback regarding labor market composition (i.e., how many group-mates chose each market) and relative earnings in each market increase the selection of the formal labor market. This feedback increases the choice of the formal labor market by six percentage points (from 64% to 70%) and increases the accuracy of beliefs regarding labor market composition. Informing the average earnings in both markets seems to work as a focal point that increases participation in the formal market.

Suggested Citation

  • Romero, Steffanny & Mantilla, Cesar, 2022. "Beliefs and selection in formal and informal labor markets: an experiment," OSF Preprints q2x8d_v1, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:q2x8d_v1
    DOI: 10.31219/osf.io/q2x8d_v1
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