Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/34313 
Year of Publication: 
2007
Series/Report no.: 
IZA Discussion Papers No. 2950
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We model decisions with respect to formality or informality for entrepreneurs in a new industry for a developing economy. We show that informality allows a leader to explore, without significant sunk costs, the potential profitability of the industry; that is, informality may be a stepping stone, enabling an entrepreneur to experiment cheaply in an uncertain environment. There are circumstances under which, without this option, the industry would not become established. We analyse the roles of parameters such as a minimum wage rate and we show that the existence of finance constraints can actually encourage entry in this context.
Document Type: 
Working Paper

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