Abstract

http://ssrn.com/abstract=1672174
 
 

References (46)



 
 

Citations (22)



 


 



The Unofficial Economy and Economic Development


Rafael La Porta


Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Andrei Shleifer


Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

December 2008

NBER Working Paper No. w14520

Abstract:     
In developing countries, informal firms (those that are not registered with the government) account for about half of all economic activity. We consider three broad views of the role of such firms in economic development. According to the romantic view, these firms would become the engine of economic growth if not stopped by government regulation. According to the parasite view, informal firms, by avoiding taxes and regulations, unfairly compete with the more efficient formal firms and, by taking away their market share, undermine economic progress. According to the dual view, informal firms are highly inefficient, do not pose much threat to the formal firms, but also do not contribute to economic growth, which is driven by the efficient formal firms.Using data from World Bank firm level surveys, we find that informal firms are small and extremely unproductive, compared even to the small formal firms, and especially relative to the larger formal firms. Compared to the informal firms, formal ones are run by much better educated managers. As a consequence, they use more capital, have different customers, market their products, and use more external finance. Hardly any formal firms had ever operated informally. This evidence is inconsistent with the romantic and parasite views, but supports the dual view. In this "Walmart" theory of economic development, growth comes from the creation of the highly productive formal firms. Informal firms keep millions of people alive, but disappear over time.

Number of Pages in PDF File: 67

working papers series





Download This Paper

Date posted: September 7, 2010  

Suggested Citation

La Porta, Rafael and Shleifer, Andrei, The Unofficial Economy and Economic Development (December 2008). NBER Working Paper No. w14520. Available at SSRN: http://ssrn.com/abstract=1672174

Contact Information

Rafael La Porta (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andrei Shleifer
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)
HOME PAGE: http://www.economics.harvard.edu/~ashleife/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Feedback to SSRN


Paper statistics
Abstract Views: 685
Downloads: 32
References:  46
Citations:  22
People who downloaded this paper also downloaded:
1. Enforcement of Regulation, Informal Labor and Firm Performance
By Rita Almeida and Pedro Carneiro

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.406 seconds