Size Dependent Policies, Informality and Misallocation
IMF Working Papers, August 2, 2018
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Bibliographic details
- Authors: Era Dabla-Norris, Laura Jaramillo, Frederico Lima, Alexandre Sollaci
- Published: August 2, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484372340.001
Research question and scope
- Examine the effect of size-dependent policies in developing economies by focusing on a set of regulations that are applicable to firms with 20 or more formal employees in Peru.
- Extend the framework proposed by Garicano et al. (2016) to model and estimate the Peruvian economy and perform counterfactual exercises.
Firm behavioral responses (as identified)
- Firms can adjust to the regulations by:
- reducing their size,
- shifting employment composition, or
- splitting into subunits that fall below the regulatory threshold.
- These actions are consistent with observed discontinuities in the distributions of firm size and employment composition.
Main findings
- Size-dependent regulations are costly for the economy, especially in the presence of labor market rigidities.
- Size-dependent regulations lead to lower aggregate wages, profits, and output.
- Access to informal labor does not mitigate the economic impact of the size-dependent regulations, as the increase in informal employment is largely offset by a decline in formal employment.
Content in this bundle
- Size Dependent Policies, Informality and Misallocation, WP/18/179, August 2018