Informal Sector and Economic Development: The Credit Supply Channel

22 Pages Posted: 26 Feb 2016

See all articles by Baptiste Massenot

Baptiste Massenot

University of Toulouse - Toulouse Business School

Stéphane Straub

University of Toulouse 1 - Advanced Research in Quantitative Applied Development Economics (ARQADE); University of Toulouse 1 - Toulouse School of Economics (TSE); University of Toulouse 1 - Industrial Economic Institute (IDEI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

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.

JEL Classification: O16, O43, E26

Suggested Citation

Massenot, Baptiste and Straub, Stéphane, Informal Sector and Economic Development: The Credit Supply Channel (April 2016). Economic Inquiry, Vol. 54, Issue 2, pp. 1046-1067, 2016, Available at SSRN: https://ssrn.com/abstract=2738288 or http://dx.doi.org/10.1111/ecin.12301

Baptiste Massenot (Contact Author)

University of Toulouse - Toulouse Business School ( email )

20, bd Lascrosses
BP 7010
Toulouse, 31068
France

Stéphane Straub

University of Toulouse 1 - Advanced Research in Quantitative Applied Development Economics (ARQADE) ( email )

21 Allee de Brienne
Toulouse, 31000
France

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

Place Anatole-France
Toulouse Cedex, F-31042
France

University of Toulouse 1 - Industrial Economic Institute (IDEI)

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France

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