What sustains informality?
A study of interactions between formal and informal sector firms
This article considers two vertical links between informal and formal sector firms and studies their implications. First, we model a situation where final products produced by the formal and informal sector firms are differentiated in terms of quality and consumption demand for the informal sector firm is related to the distribution of income.
Less well-off consumers generate demand for the low-priced, low quality good produced by the informal sector. Our articlde studies the implications of this link for the size of the informal sector. Second, we analyse a situation where, instead of competing with the formal sector firm, the informal sector firm produces an intermediate good for the other firm.