Consequences Of Informality

Question 1

Formalisation on firm performance (sales, profits, size etc)

Answer 1

No effect

Question 2

When there are positive average effects (e.g De Mel found higher profits for formalised)

Was driven by few firms experiencing substantial growth, rather than holistic increases.

What is this idea consistent with

Answer 2

Benefits of formalisation are low for most small scale entrepreneurs

Question 3

Why might this be

Answer 3

Positive effects of formality may take long to appear

Question 4

Bachas explores informal consumption effect: key result

Answer 4

Informality Engel curves - if expenditure is lower, spend more on informal consumption (e.g haggling, dont get receipts for lower prices etc)

Question 5

Implications for policymakers on taxes

Answer 5

Policy makers should reduce taxing necessities, since bad for redistribution, hence why they increase informal consumption when poorer.

Question 6

However problem with low tax for necessities

Answer 6

Subsidy for the rich - benefits richer households with little redistribution for poor.

Question 7

Informality on can reduce human capital. How (2)

Answer 7

Lower individual investments in schooling. (Parents have little incentive to send kids to school as can get job in informal sector)

Informality has lower on-the-job HC accumulation

Question 8

Effects on increased enforcement (5)

Answer 8

Lower informality and more formality so…

-Composition effects (which firms exist)
-Less low quality jobs
-Capital accumulation (more access to credit)
-Human capital accumulation (jobs require educ)
-Occupational choices

These factors increasing productivity… but effect on output is undetermined (since there are costs to enforcement too e.g unemployment, esp if targeted at survival firms not parasite firms!)