## Size Dependent Policies, Informality and Misallocation

_IMF Working Papers, August 2, 2018_

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**Canonical URL:** [Size Dependent Policies, Informality and Misallocation](https://www.imf.org/en/publications/wp/issues/2018/08/02/size-dependent-policies-informality-and-misallocation-46125)

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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

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### 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.

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## Content in this bundle

- **Size Dependent Policies, Informality and Misallocation, WP/18/179, August 2018**
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_Source: https://www.imf.org/en/publications/wp/issues/2018/08/02/size-dependent-policies-informality-and-misallocation-46125_