Seeking Rent in the Informal Sector

Abstract

Rent seeking within the vast informal segment of the developing world is a relatively under‐explored topic in the interface of labor market policies and public economics. Moreover, how rent seeking and corruption within the informal segment gets affected by economic reforms targeted for the formal sector is rarely discussed in the literature. This paper fills the gap. We identify conditions under which economic reform in the formal segment will increase the rate of corruption or rent seeking in the informal sector and raise the pay‐off for those involved in rent‐seeking activities. When the formal sector contracts due to reforms, rent seeking in the informal sector may increase and lower the level of welfare unconditionally. Economic reforms may increase corruption instead of reducing it, unlike standard conjectures.

Trade liberalization, export quality, and three dimensions of wage inequality*

“…has been largely motivated by the analyses of Carruth and Oswald (1981), Rauch (1991), Agenor and Montiel (1996), Marjit (2000Marjit ( , 2003, Kar (2011), andKar et al (2019). 10 Equations 3-12 determine the 15 variables in our system:w s , w, R, r 1 , r 2 , Q 1 , Q 2 , X, Y, Z 1 , Z 2 , and four input coefficients a hj .…”

“…The production of Y is organized in the formal sector and that of X in the informal sector of the economy. Following the standard literature (Kar et al., 2019; Marjit, 2003; Marjit & Kar, 2011), we distinguish between the formal and informal sectors in terms of wage formation: in the formal sector unskilled workers are paid a fixed wage , whereas those in the informal sector are paid the competitive market‐determined wage w . The formal–informal segmentation has been observed primarily in unskilled‐labor markets (Agenor & Montiel, 1996; Assaad, 1993; Fields, 1990; Marjit & Acharyya, 2003; Marjit & Kar, 2011) and thus for production of goods and services that intensively use unskilled labor.…”

“…This assumption of complete absorption of displaced unskilled workers from the formal into the informal sector such that there is zero open unemployment in the economy has been largely motivated by the analyses of Carruth and Oswald (1981), Rauch (1991), Agenor and Montiel (1996), Marjit (2000, 2003), Marjit and Kar (2011), and Kar et al. (2019). 10…”

Can taxes raise output and reduce inequality? The case of lobbying

“…As a recent example, Google increased its spending from about 600,000 Euro in 2013 to more than 4 million Euro in 2017. Given the increases observed in rent‐seeking activities in the United States, the European Union, and in developing countries (Iqbal & Daly, 2014; Dutta, Kar, & Roy, 2013, Kar et al, 2019), the mechanism we identify is likely to become more important over time.…”

Factors of the Shadow Economy in Market and Transition Economies during the Post-Crisis Period: is there a Difference?

“…This indicator presents "the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as the capture of the state by elites and private interests" (Apaza, 2009). Kar et al (2020) suggest that a large size of the SE is "an outcome of corruption among public enforcement authorities who use state machinery to extract rents from illegal activities in exchange for nonintervention." Such practices also have many negative economic consequences, such as reduced tax revenue, increased illegal trade, and the traps of slow development (Saha et al, 2021).…”