Informality and Rent-Seeking Bureaucracies in a Model of Long-Run Growth

29 Pages Posted: 26 Nov 2012

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 1999

Abstract

This paper explores the links among growth, the informal economy, and rent-seeking bureaucracies. The presence of congestion associated with the enforcement of property right implies that informality can be useful. Whether bureaucratic rent-seeking is detrimental to growth then depends on how good a substitute informality is to production in the formal sector. In order to create profits which can be appropriated, rent-seeking bureaucrats limit entry into the formal economy. As a result, firms operate in the informal sector even when the cost of informality is high, in which case lower growth emerges. However, when the cost of informality is low, a large number of firms choose to operate informally irrespective of entry conditions. In the latter case, growth is unaffected by a rent-seeking bureaucracy as entry restrictions in the formal economy do not bind.

Keywords: Informal sector, rent-seeking, economic growth

JEL Classification: E13, O10

Suggested Citation

Sarte, Pierre-Daniel, Informality and Rent-Seeking Bureaucracies in a Model of Long-Run Growth (September 1, 1999). FRB Richmond Working Paper No. 99-7. Available at SSRN: https://ssrn.com/abstract=2180981 or http://dx.doi.org/10.2139/ssrn.2180981

Pierre-Daniel Sarte (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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