In developing countries, informal firms (those that are not registered with the government) account for about half of all economic activity. We consider three broad views of the role of such firms in economic development. According to the romantic view, these firms would become the engine of...

We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly...

This paper examines the macroeconomic interaction between informality and gender inequality in the labor market. A dynamic stochastic general equilibrium model is built to study the impact of gender-targeted policies on female labor force participation, female formal employment, gender wage gap,...

This paper examines the extent to which developing countries benefit from intersectoral factor transfers by specifying the impact and determinants of sectoral changes and of the degree of dualism (or allocation inefficiency) in a dual economy model. Conditions under which factor reallocation is...

This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer...

The coexistence of urban and rural poverty and migration to cities is studied in a dual economy model where the acquisition of skills is costly and involves migration to urban areas. In this model, both the distribution of innate abilities and the distribution of wealth matter for the migration...

Growth and structural transformation of the manufacturing sector in developing countries are generally considered to be the result of the expansion of the "modem" (large-scale) sector relative to the "traditional" (small-scale) sector. Examining the sources of labor productivity growth in...

The paper addresses the impact of HIV/AIDS on per capita output and income, with particular emphasis on the role of labor mobility between the formal and informal sectors, and the impact of the epidemic on investment decisions. The study finds that HIV/AIDS affects both the supply of labor and...