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How Much is too Much? An Endogenous Growth Model with an Optimal Level of Informality

Author

Listed:
  • Teodor Sedlarski

    (Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics)

  • Ilia Atanasov

    (Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics)

  • Alexandra Korcheva

    (Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics)

Abstract

We develop an endogenous growth model in which informal practices, trust and transaction costs take the key role and dictate the speed of the long-term economic development. A decision maker chooses how much informal behaviour to allow in the economic system in order to maximize the rate of innovation by taking into account the productivity gains and loses associated with building trust and lowering transaction costs. The model shows that economic systems in which changes in informal practices are taken into account will grow at a faster rate compared to economic systems in which the same changes are ignored. This provides an alternative explanation to divergence in output per capita between different countries from the point of view of the new institutional economics.

Suggested Citation

  • Teodor Sedlarski & Ilia Atanasov & Alexandra Korcheva, 2023. "How Much is too Much? An Endogenous Growth Model with an Optimal Level of Informality," Bulgarian Economic Papers bep-2023-02, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Feb 2023.
    • Handle: RePEc:sko:wpaper:bep-2023-02
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    economic growth; informal institutions; new institutional economics;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • Z1 - Other Special Topics - - Cultural Economics

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