Taxation, credit constraints and the informal economy
This paper extends Evans and Jovanovic (1989)'s entrepreneurship model to incorporate the informal sector. Specifically, entrepreneurs can operate either in the formal sector – in which they have limited access to credit markets and must pay taxes – or in the informal sector – in which they can...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Emerald Publishing
2016-01-01
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| Series: | EconomiA |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S1517758016300182 |
| _version_ | 1818493055281397760 |
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| author | Julia P. Araujo Mauro Rodrigues |
| author_facet | Julia P. Araujo Mauro Rodrigues |
| author_sort | Julia P. Araujo |
| collection | DOAJ |
| description | This paper extends Evans and Jovanovic (1989)'s entrepreneurship model to incorporate the informal sector. Specifically, entrepreneurs can operate either in the formal sector – in which they have limited access to credit markets and must pay taxes – or in the informal sector – in which they can avoid paying taxes, but have no access to credit markets. In addition, technology in the informal sector is both less productive and more labor intensive than that in the formal sector. We calibrate the model to the Brazilian economy, and evaluate the impact of credit frictions and taxation on occupational choices, aggregate output and inequality. Removing all distortions can improve aggregate efficiency considerably, largely because this induces entrepreneurs to switch to the formal sector, where the technology is superior. Most of this effect comes from removing credit market frictions, but taxes on formal businesses are also important. The elimination of distortions can also reduce income inequality substantially. |
| first_indexed | 2024-12-10T17:50:13Z |
| format | Article |
| id | doaj.art-269182b3818a48249e6358f840efa595 |
| institution | Directory Open Access Journal |
| issn | 1517-7580 |
| language | English |
| last_indexed | 2024-12-10T17:50:13Z |
| publishDate | 2016-01-01 |
| publisher | Emerald Publishing |
| record_format | Article |
| series | EconomiA |
| spelling | doaj.art-269182b3818a48249e6358f840efa5952022-12-22T01:39:05ZengEmerald PublishingEconomiA1517-75802016-01-01171435510.1016/j.econ.2016.03.003Taxation, credit constraints and the informal economyJulia P. AraujoMauro RodriguesThis paper extends Evans and Jovanovic (1989)'s entrepreneurship model to incorporate the informal sector. Specifically, entrepreneurs can operate either in the formal sector – in which they have limited access to credit markets and must pay taxes – or in the informal sector – in which they can avoid paying taxes, but have no access to credit markets. In addition, technology in the informal sector is both less productive and more labor intensive than that in the formal sector. We calibrate the model to the Brazilian economy, and evaluate the impact of credit frictions and taxation on occupational choices, aggregate output and inequality. Removing all distortions can improve aggregate efficiency considerably, largely because this induces entrepreneurs to switch to the formal sector, where the technology is superior. Most of this effect comes from removing credit market frictions, but taxes on formal businesses are also important. The elimination of distortions can also reduce income inequality substantially.http://www.sciencedirect.com/science/article/pii/S1517758016300182Informal sectorCredit frictionsTaxationEntrepreneurship |
| spellingShingle | Julia P. Araujo Mauro Rodrigues Taxation, credit constraints and the informal economy EconomiA Informal sector Credit frictions Taxation Entrepreneurship |
| title | Taxation, credit constraints and the informal economy |
| title_full | Taxation, credit constraints and the informal economy |
| title_fullStr | Taxation, credit constraints and the informal economy |
| title_full_unstemmed | Taxation, credit constraints and the informal economy |
| title_short | Taxation, credit constraints and the informal economy |
| title_sort | taxation credit constraints and the informal economy |
| topic | Informal sector Credit frictions Taxation Entrepreneurship |
| url | http://www.sciencedirect.com/science/article/pii/S1517758016300182 |
| work_keys_str_mv | AT juliaparaujo taxationcreditconstraintsandtheinformaleconomy AT maurorodrigues taxationcreditconstraintsandtheinformaleconomy |