Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy

45 Pages Posted: 17 Aug 2007

See all articles by John Bennett

John Bennett

Brunel University London - Economics and Finance; Institute for the Study of Labor (IZA); University of Wales, Swansea - School of Business and Economics; Centre for Economic Policy Research (CEPR)

Saul Estrin

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: July 2007

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.

Keywords: informal sector, entry, developing economy

JEL Classification: O17, L10

Suggested Citation

Bennett, John and Estrin, Saul, Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy (July 2007). IZA Discussion Paper No. 2950. Available at SSRN: https://ssrn.com/abstract=1006774

John Bennett (Contact Author)

Brunel University London - Economics and Finance ( email )

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Institute for the Study of Labor (IZA)

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University of Wales, Swansea - School of Business and Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Saul Estrin

London School of Economics & Political Science (LSE) ( email )

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United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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