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Informal Sector: The Credit Market Channel

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Abstract
We build a model of firms' choice between formality and informality. Complying with costly registration procedures allows the firms to benefit from key public goods, enforcement of property rights and contracts, that make the participation in the formal credit market possible. In a moral hazard framework with credit rationing, their decision is shaped by the interaction between the cost of entry into formality, and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements. The model is consistent with existing stylized facts on the determinants of informality.

Suggested Citation

  • Stephane Straub, 2005. "Informal Sector: The Credit Market Channel," Edinburgh School of Economics Discussion Paper Series 101, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:101
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    More about this item

    Keywords

    formal and informal sectors; credit markets; institutional arrangements;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • G2 - Financial Economics - - Financial Institutions and Services
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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