| Abstract: |
What are the aggregate effects of informality in a financially constrained
economy? We develop and calibrate an entrepreneurship model to data on matched
employer-employee from both formal and informal sectors in Brazil. The model
distinguishes between informality on the business side (extensive margin) and
the informal hiring by formal firms (intensive margin). We find that when
informality is eliminated along both margins, aggregate output increases 9.3%,
capital 14.7%, TFP 5.4%, and tax revenue37%. The output and TFP increases
would be much larger if informality were only eliminated on the extensive
margin, a result that supports the view that the informal economy can play a
positive role in an economy with financial frictions. Finally, we find that
the output cost of financing social security in our baseline model is about
twice as large as the one in an economy with no frictions. |