Economics

Bouwe R. Dijkstra

Good and Bad Equilibria with the Informal Sector

Volume 167 () / Issue 4, pp. 668-685 (18)

18,00 € including VAT
article PDF
We examine whether an economy can have a bad (small or no formal sector, high taxes) as well as a good (small or no informal sector, low taxes) equilibrium. The government maximizes a combination of instantaneous welfare and the rate of decline of the informal sector. When the instantaneous welfare component only contains formal-sector welfare, multiple equilibria can occur if the elasticity of average to marginal cost for the public good is less than one. More regard for the informal sector leads to a worse equilibrium and to a higher prevalence of multiple equilibria.
Authors/Editors

Bouwe R. Dijkstra No current data available.