The Logic of the Informal Economy
In developing countries, an unusually large number of small, unproductive firms coexist with a small number of large, productive firms, which, according to economic theory, is inefficient. So, why do the inefficient firms survive, trapping resources in low-productivity activities?
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CAMBRIDGE – A specter is haunting the world’s developing countries – the specter of the “informal” economy. For some, the informal sector includes all businesses that have not been registered with the authorities. For others, it refers to businesses that escape taxation. The International Labor Organization defines it as comprising firms that are small enough to fall outside the labor code.