Chapter

The Political Economy of Informality

Sugata Marjit and Saibal Kar

in The Outsiders

Published in print March 2011 | ISBN: 9780198071495
Published online September 2012 | e-ISBN: 9780199081257 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780198071495.003.0002
The Political Economy of Informality

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This chapter examines the political economy aspects of the survival and performance of the informal sector. It develops a political support model and an interlinked reforms-bribery model to show that the level of ‘informality’ can, on the one hand, be the outcome of a conscious choice of society and, on the other, may behave unexpectedly in the presence of corruption in the system. In such societies where income levels in the informal sector depend significantly on the level of governance adopted by the state, the government chooses lower levels of governance and tax rates. As poverty increases in these economies, similar choices are manifested by state authorities. Introduction of the informal sector in such models plays a pivotal role in challenging the prediction of conventional political economy models where more poverty and inequality triggers a choice of higher tax rates at the political equilibrium.

Keywords: informal activities; informality; political support model; reforms-bribery model; corruption; governance; tax rate; redistribution

Chapter.  8135 words. 

Subjects: Economic Development and Growth

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