Size Dependent Policies, Informality and Misallocation

63 Pages Posted: 22 Aug 2018

See all articles by Era Dabla-Norris

Era Dabla-Norris

International Monetary Fund (IMF)

Laura Jaramillo

International Monetary Fund (IMF)

Frederico Lima

International Monetary Fund (IMF)

Alexandre Sollaci

University of Chicago

Date Written: August 2018

Abstract

We examine the effect of size-dependent policies in developing economies by focusing on a setof regulations that are applicable to firms with 20 or more formal employees in Peru. Firms canadjust to the regulations by (a) reducing their size, (b) shifting employment composition, or (c)splitting into subunits that fall below the regulatory threshold. We show that these actions areconsistent with observed discontinuities in the distributions of firm size and employmentcomposition. We extend the framework proposed by Garicano et al. (2016) to model andestimate the Peruvian economy and perform counterfactual exercises. Size-dependentregulations are costly for the economy, especially in the presence of labor market rigidities, andlead to lower aggregate wages, profits, and output. We also find that access to informal labordoes not mitigate the economic impact of the size-dependent regulations, as the increase ininformal employment is largely offset by a decline in formal employment.

Keywords: Productivity, Employment, Underground economy, Unemployment, Wages, size-dependent policies, misallocation, informality, General, Informal Economy

JEL Classification: E24, E26, J40

Suggested Citation

Dabla-Norris, Era and Jaramillo, Laura and Lima, Frederico and Sollaci, Alexandre, Size Dependent Policies, Informality and Misallocation (August 2018). IMF Working Paper No. 18/179. Available at SSRN: https://ssrn.com/abstract=3236793

Era Dabla-Norris (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Laura Jaramillo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Frederico Lima

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexandre Sollaci

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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