Informality, Saving and Wealth Inequality in Colombia

40 Pages Posted: 20 Mar 2015

See all articles by Catalina Granda

Catalina Granda

Universidad de Antioquia

Franz Hamann

Central Bank of Colombia

Date Written: February 2015

Abstract

The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. This paper aims to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, the paper builds an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and it is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments additionally make it possible to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered.

Keywords: Informality, Wealth inequality, Saving, Occupational choice models

JEL Classification: E21, E26, O17

Suggested Citation

Granda Carvajal, Catalina and Hamann, Franz, Informality, Saving and Wealth Inequality in Colombia (February 2015). IDB Working Paper No. IDB-WP-575, Available at SSRN: https://ssrn.com/abstract=2581400 or http://dx.doi.org/10.2139/ssrn.2581400

Catalina Granda Carvajal (Contact Author)

Universidad de Antioquia ( email )

Calle 67 No. 53 108
Apartado Aereo
Medellin, 1226
Colombia

Franz Hamann

Central Bank of Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

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