Public Financing and Financial Frictions and Underground Economy Articles uri icon

publication date

  • December 2022

start page

  • 1

end page

  • 17

International Standard Serial Number (ISSN)

  • 0304-3932

Electronic International Standard Serial Number (EISSN)

  • 1873-1295


  • What are the aggregate effects of informality in a financially constrained economy? We
    develop and calibrate an entrepreneurship model to data on matched employer-employee
    from both formal and informal sectors in Brazil. The model distinguishes between informality on the business side and the hiring of informal workers by formal businesses. Policies that reduce business informality increase aggregate output by 10.8%, TFP by 6.6%, and tax revenue by 33.2%. On the contrary, output and TFP decrease when policies reduce the
    intensive margin of informality, underscoring that the informal economy can play a positive role in an economy with financial frictions.


  • Economics


  • occupational choice; informality; financial frictions; public finance