Article,

Informal firms in developing countries: entrepreneurial stepping stone or consolation prize?

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Small Business Economics, 34 (1): 53-63 (2010)10.1007/s11187-009-9194-6.

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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