Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/174439 
Year of Publication: 
2016
Series/Report no.: 
Working Papers No. 2016-09
Publisher: 
Banco de México, Ciudad de México
Abstract: 
A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate TFP and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.
Subjects: 
informal sector
misallocation
aggregate productivity
financial constraints
size-dependent taxes
JEL: 
E26
L11
O11
O17
O40
Document Type: 
Working Paper
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