Financial structure,informality and development |
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Authors: | Pablo N D'Erasmo Hernan J Moscoso Boedo |
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Institution: | 1. University of Maryland, Department of Economics, 3105 Tydings Hall, College Park, MD 20742, United States;2. University of Virginia, United States |
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Abstract: | The impact of capital market imperfections and costs of creating and operating formal sector firms on total factor productivity is studied. We propose a firm dynamics model with endogenous formal and informal sectors where firms face a technology adoption opportunity. The model predicts that countries with a low degree of debt enforcement and high costs of formality are characterized by low allocative efficiency and large output shares produced by low productivity, informal sector firms. For frictions parametrized using the Doing Business database, the model generates a drop in total factor productivity of up to 25% relative to the US. |
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