Informal sector: The credit market channel

By Stéphane Straub. 2005

379 citations recorded by the source corpus.

We build a model of firms' choice between formality and informality. Complying with costly registration procedures allows the firms to benefit from key public goods, enforcement of property rights and contracts, that make the participation in the formal credit market possible. In a moral hazard framework with credit rationing, their decision is shaped by the interaction between the cost of entry into formality, and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements. The model is consistent with existing stylized facts on the determinants of informality.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c378bd557c3345bfbdd897b259420ac1dce24c29

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Citations in the corpus

Governance regimes, corruption and growth: theory and evidence (2008, background): “In particular in the context of less developed countries, yt is also intended to capture other benefits of formalization such as, for example, access to publicly financed infrastructure (Dessy and Pallage, 2003) or participation in the formal credit market (Straub, 2005).”
Entry regulation and business start-ups : evidence from Mexico (2007, neutral): “The most cited potential beneﬁts of being formal involve government protection of property rights, ease of transacting with other ﬁrms, and better access to credit for the ﬁrm (see Straub (2005)).”
Explaining Enterprise Performance in Developing Countries with Business Climate Survey Data (2008, background): “With regard to infrastructure indicators, Straub (2008) makes a number of suggestions for more detailed questions such as firms’ access to alternative transport modes (railways, airports, roads etc.”
Financial Development and the Underground Economy (2013, background): “Straub (2005) develops a model in which firms choose between formality and informality.”
The Informal Sector (2007, neutral): “nominal interest rate of 22% per-month, while formal firms paid only 4.9% per month. Straub [ 18 ]”
Macro-level determinants of formal entrepreneurship versus informal entrepreneurship (2014, background): “…goals in the formal Please cite this article as: Thai, M.T.T., Turkina, E., Macro-level determinants of formal entrepreneurship versus informal entrepreneurship, Journal of Business Venturing (2013), http://dx.doi.org/10.1016/j.jbusvent.2013.07.005 economy (Amaral and Quintin, 2006; Straub, 2005).”
Informality: Causes and Consequences for Development (2020, background): “The credit channel has been theoretically analysed in early papers such as Straub (2005) and Quintin (2008), which emphasise the role of weaker (or inexistent) contract and debt enforcement in the informal sector.”
Formal Versus Informal Finance : Evidence from China (2008, neutral): “…not associated with a delegated monitor, unlike formal financing,19 and the definition in the economics literature (e.g., Kandori 1992; Udry 1994; Straub 2005) that informal financing is characterized by the use of selfenforcing contracts and social sanctions, including coercion and violence, to…”
Job Search and Mobility in Developing Countries. Theory and Policy Implications (2008, background): “2 See, in particular, the papers by Zarembka (1970), Blomqvist (1978), Arellano (1981), Takagi (1984), Nagakome (1989), Brueckner (1990), Stark et al.”
MODELING INFORMALITY FORMALLY: HOUSEHOLDS AND FIRMS (2012, positive): “Straub (2005) develops a model where formal firms pay an entry fee to become formal.”
Globalization and Informal Jobs in Developing Countries (2010, background): “This seems to explain, for instance, why in Argentina formally employed workers tend to be older, with more education and higher wages than informal workers (Amaral and Quintin, 2005; 2006).”
Does it Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability (2008, neutral): “Another often-discussed potential benefit of formality is better access to credit (e.g. Straub (2005)).”
Gender, Entrepreneurship, and the Formal–Informal Dilemma: Evidence from Indonesia (2015, background): “Informal firms cannot benefit from property rights protection or contract enforcement laws provided by the state (Straub, 2005).”