We test implications of a simple equilibrium model of informality using a survey of 48,000 small firms in Brazil. In the model, agent's ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments....

The major claim of this article is twofold, that is, that fixed assets in small manufacturing enterprises in developing countries have to be seen with respect to two roles. The first is capital intensity. The second is the collateral value of these assets. The former is associated with the small...