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Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy

Author

Listed:
  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Marcio V. Correa

    (CAEN - Graduate Studies in Economics, Federal University of Ceara)

  • Marcos R. V. Magalhaes

    (CAEN - Graduate Studies in Economics, Federal University of Ceara)

Abstract

We study an equilibrium occupational choice model where heterogeneous agents decide to become either workers or entrepreneurs in the formal or informal sector. Informal output is subjected to taxation determined by a combination of managers capital choice and the society's tolerance of informality. The model is consistent with empirical evidence for the Brazilian informal sector. The counterfactual analysis shows substantial heterogeneity of policy effects on occupational choices (entrepreneur-worker) and within the entrepreneurial choices (formal-informal). Changes in the society's tolerance of informality lead agents to shift between the two entrepreneurial choices rather than in the entrepreneur-worker dimension.

Suggested Citation

  • Marcelo Arbex & Marcio V. Correa & Marcos R. V. Magalhaes, 2020. "Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy," Working Papers 2004, University of Windsor, Department of Economics.
    • Handle: RePEc:wis:wpaper:2004
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    More about this item

    Keywords

    Informal Sector; Social Norms; Credit Constraints; Limited Enforcement;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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