Abstract
The potential dynamic benefits of a firm having the option to adopt
informal status are analysed. Informality may be a stepping stone,
without which formality may never be achieved. This result is obtained
for a broad range of realistic parameter values, suggesting a potential
dynamic case for government support of informal firms. Informality
may alternatively play a converse role as a consolation prize, with
a firm only entering an industry (formally) because it recognizes
that if profitability is disappointing, it can switch to informality.
However, this result is obtained for a range of parameter values
so narrow as to be of no practical significance.
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