Tuesday, September 8, 2009

Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?

By Bennett, John

The author analyses potential dynamic benefits for a firm from having the option of adopting informal status. Informality may be a stepping stone, without which formality might never be achieved. This result obtains for a broad range of realistic parameter values, suggesting a potential dynamic case for government support of informal firms.

Informality may alternatively play a converse role as a consolation prize, a firm only entering an industry (formally) because it recognizes that if profitability is disappointing, it can switch to informality. However, this result obtains for a range of parameter values so narrow to be of no practical significance.

Keywords: informality; entrepreneurship

URL: http://d.repec.org/n?u=RePEc:unu:wpaper:rp2009-19&r=dev