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INEQUALITY, INFORMALITY, AND CREDIT MARKET IMPERFECTIONS

Published online by Cambridge University Press:  23 June 2017

Roberto Dell'Anno
Roberto Dell'Anno*
Affiliation:
University of Salerno
*
Address correspondence to: Prof. Roberto Dell'Anno, Department of Economics and Statistics (DISES), CELPE, University of Salerno, Via Giovanni Paolo II, 132, 84084 Fisciano (Sa), Italy; e-mail: rdellanno@unisa.it.
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Abstract

This paper develops a microfounded macroeconomic modeling framework to investigate the relationship between informality and the income distribution. We show that multiple equilibria may rise if credit markets are imperfect and that there is a nondivisible entry cost in the formal economy. The theoretical analysis demonstrates that in the steady state, low levels of inequality are negatively correlated with high informality; conversely, high inequality exacerbates informality. This finding supports the hypothesis of an optimal level of inequality that minimizes the informal economy relative to the impact of other levels of inequality. However, for ordinary income distributions, changes in the level of inequality have only a slight effect on the informality rate. We calibrate the model using data on the U.S. and Mexican economies to estimate the level of inequality that minimizes the informality rate. The self-employment rate emerges as the most relevant determinant of the informality rate.

Keywords

Informal EconomyIncome InequalityFormal Entry CostSelf-employment
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 5 , July 2018 , pp. 1184 - 1206
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

I wish to thank Antonio Abatemarco, Desiree Teobaldelli, and two anonymous reviewers for providing insightful comments. Any remaining errors are mine alone.

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