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| Title: | Entrepreneurial Entry in Developing Economies: Modeling Interactions Between the Formal and Informal Sector |
| Authors: | Bennett, John
Estrin, Saul |
| Keywords: | entrepreneurial entry, developing economies, formality, informality |
| Issue Date: | 12-Sep-2007 |
| Series/Report no.: | IPC Working Paper Series No. 44 |
| Abstract: | Using a simple two-firm, two-period model, we analyze for a developing economy the
process of ‘entrepreneurial entry,’ that is, entry by new firms into an industry that did
not previously exist in that country, focusing on the choice between formal and
informal status. Thus we explore issues such as how informality may enable an
entrepreneur to test the profitability of an industry without incurring large sunk costs,
and how strategic interaction may affect such entrepreneurial decisions. In this
context we examine comparative statics, e.g. with respect to the minimum formal
sector wage rate and the realized profitability of the industry. Under some parameter
values there is churning in terms of both the number of firms and their status. Also,
we show that financial constraints can interact with the option of informality to induce
entry. |
| Appears in Collections: | International Policy Center - Working Paper Series
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| IPC-working-paper-044-BennettEstrin.pdf | | 280Kb | Adobe PDF | View/Open |
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