Informality and public policies: a theoretical model
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2023-07-10
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Riella, Gil
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This article presents a theoretical model that examines informality and the decisionmaking process underlying this phenomenon. Within this conceptual framework, agents possess heterogeneous talent in managing production, and informal firms face increasing costs relative to their size, defined by capital allocation constraints or size limitations of these firms on the model’ configuration. In contrast, registered firms are subject to an ad valorem tax rate. Given particularly market structures and agents’ endowments, individuals face the choice of remaining as workers, operating formal firms, or engaging in informal activities. The results demonstrate the existence of threshold points in managerial abilities that determine the size of each sector, and highlight the potential impact of certain public policies in better sectoral composition among individuals. We show that through complementary and well-designed formalization policies, it is possible to increase the market share of formal firms, reduce the number of workers in precarious conditions, improve production efficiency, enhance welfare, and ultimately foster economic development.