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Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?

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  • John Bennett
Abstract
We analyse potential dynamic benefits for a firm from having the option of adopting informal status. Informality may be a stepping stone, without which formality might never be achieved. This result obtains for a broad range of realistic parameter values, suggesting a potential dynamic case for government support of informal firms. Informality may alternatively play a converse role as a consolation prize, a firm only entering an industry (formally) because it recognizes that if profitability is disappointing, it can switch to informality.

Suggested Citation

  • John Bennett, 2009. "Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize?," WIDER Working Paper Series RP2009-19, World Institute for Development Economic Research (UNU-WIDER).
    • Handle: RePEc:unu:wpaper:rp2009-19
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    File URL: https://www.wider.unu.edu/sites/default/files/RP2009-19.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Business enterprises; Entrepreneurship; Informal sector;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • D2 - Microeconomics - - Production and Organizations
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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