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

  • Marcelo Arbex EMAIL logo , Márcio V. Corrêa and Marcos R. V. Magalhães
Published/Copyright: February 25, 2022
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 23 Issue 1

Abstract

We study an equilibrium two-sector occupational choice model – agents can be (formal or informal) entrepreneurs or workers. An informal entrepreneur faces taxation determined by the combination of her capital choice and society’s tolerance of informality. Our model is consistent with many empirical findings regarding the informal sector in Brazil, a developing economy with a large informal sector. With a calibrated version of our model, we show that as society’s tolerance of informality decreases, the informal sector employs less capital and labor, and informality decreases. We conduct several counterfactual exercises. Informality is substantially lower in economies that are less tolerant of informal activities, formal entrepreneurs have more access to financial markets, and taxation of output and labor is lower. We extend the model to consider stochastic taxation of informal activities – a higher (average) informal output taxation and its variability reduce informality.

Keywords: informal sector; social norms; credit constraints; limited enforcement
JEL Classification: E6; E26; H26; O11; O17; Z13
Corresponding author: Marcelo Arbex, Department of Economics, University of Windsor, Windsor, Canada; and CAEN/UFC International Visiting Professor, E-mail:

Acknowledgments

We thank the Editor, Arpad Abraham, two anonymous referees, and participants at the 42nd Meeting of the Brazilian Society of Econometrics, 2021 Canadian Economics Association and 2020 Economics of Informality Conference meetings for helpful suggestions and comments. All remaining errors are our own.

  1. Research funding: We thank CNPq and FUNCAP for financial support.

  2. Declarations of interest: None.

Appendix A

We estimate the parameters σdata = 0.152 4, κdata = 0.171 5 of a standard Pareto distribution via maximum likelihood methods for Brazil, using data from the Brazilian Household Survey PNAD (Pesquisa Nacional por Amostra de Domicílios), year 2008, which provide answers to a set of questions regarding an individual’s assets and income. Our estimated parameters suggest an income distribution that is concentrated in the group of poor agents and it has a thicker tail. Figure A.1 shows that our model stationary wealth distribution is very similar to the Brazilian empirical wealth (PNAD) distribution.

Figure A.1: Brazilian income distributions, real and simulated. Left panel – PNAD Income Distribution for the Brazilian Economy, 2008. Right panel – Simulated Economy.
Figure A.1:

Brazilian income distributions, real and simulated.

Left panel – PNAD Income Distribution for the Brazilian Economy, 2008. Right panel – Simulated Economy.

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Received: 2020-07-23
Revised: 2022-02-03
Accepted: 2022-02-04
Published Online: 2022-02-25

© 2022 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes
  4. Labor Share Dynamics and Factor Complementarity
  5. Effect of Monetary Policy on Government Spending Multiplier
  6. News-Driven Housing Booms: Spain Versus Germany
  7. Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union
  8. Housing Taxation and Economic Growth: Analysis of a Balanced-Growth Model with Residential Capital
  9. Intergenerational Linkages, Uncertain Lifetime and Educational and Health Expenditures
  10. Contributions
  11. Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy
  12. Uncertainty Shocks, Innovation, and Productivity
  13. Asymmetric Effects of Private Debt on Income Growth
  14. Interpreting Structural Shocks and Assessing Their Historical Importance
  15. Charge-offs, Defaults and the Financial Accelerator
  16. Filtering Persistent and Asymmetric Cycles
  17. Population Aging and Convergence of Household Credit
  18. Robustly Optimal Monetary Policy in a Behavioral Environment
  19. Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions
  20. The Welfare Effects of Social Insurance Reform in the Presence of Intergenerational Transfers
https://doi.org/10.1515/bejm-2021-0076
Keywords for this article
informal sector; social norms; credit constraints; limited enforcement

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes
  4. Labor Share Dynamics and Factor Complementarity
  5. Effect of Monetary Policy on Government Spending Multiplier
  6. News-Driven Housing Booms: Spain Versus Germany
  7. Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union
  8. Housing Taxation and Economic Growth: Analysis of a Balanced-Growth Model with Residential Capital
  9. Intergenerational Linkages, Uncertain Lifetime and Educational and Health Expenditures
  10. Contributions
  11. Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy
  12. Uncertainty Shocks, Innovation, and Productivity
  13. Asymmetric Effects of Private Debt on Income Growth
  14. Interpreting Structural Shocks and Assessing Their Historical Importance
  15. Charge-offs, Defaults and the Financial Accelerator
  16. Filtering Persistent and Asymmetric Cycles
  17. Population Aging and Convergence of Household Credit
  18. Robustly Optimal Monetary Policy in a Behavioral Environment
  19. Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions
  20. The Welfare Effects of Social Insurance Reform in the Presence of Intergenerational Transfers
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