Informal Sector and Economic Development: The Credit Supply Channel

SAFE Working Paper No. 106

43 Pages Posted: 28 May 2015

See all articles by Baptiste Massenot

Baptiste Massenot

Goethe University Frankfurt - Research Center SAFE

Stéphane Straub

University of Toulouse 1 - Toulouse School of Economics (TSE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions.

Suggested Citation

Massenot, Baptiste and Straub, Stephane, Informal Sector and Economic Development: The Credit Supply Channel (May 2015). SAFE Working Paper No. 106. Available at SSRN: https://ssrn.com/abstract=2611570 or http://dx.doi.org/10.2139/ssrn.2611570

Baptiste Massenot (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Stephane Straub

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

21 Allée de Brienne
F-31042 Toulouse Cedex, 31000
France
05 61 12 85 37 (Phone)
05 61 12 85 38 (Fax)

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