What Sustains Informality? A Study of the Interactions between Formal and Informal Sector Firms

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6 Citations (SciVal)


This paper considers two vertical links between informal and formal sector firms and studies their implications. First, we model a situation where final products produced by the formal and informal sector firms are differentiated in terms of quality and consumption demand for the informal sector firm is related to the distribution of income. Less well-off consumers generate demand for the low-priced, low quality good produced by the informal sector. Our paper studies the implications of this link for the size of the informal sector. Second, we analyse a situation where, instead of competing with the formal sector firm, the informal sector firm produces an intermediate good for the other firm.
Original languageEnglish
Pages (from-to)1403-1415
Number of pages13
JournalThe Journal of Development Studies
Issue number7
Early online date26 May 2022
Publication statusPublished - 31 Dec 2022

Bibliographical note

Funding Information:
I would like to thank Pranava Kadaliya for research assistance. I have also benefited from discussions with Ranjan Ray and Andrew Samuel. The paper has benefited from comments by two referees and participants at the Transforming Informal Work and Livelihoods Workshop, held in Helsinki 12–13 November 2020.

Publisher Copyright:
© 2022 UNU-WIDER. Published by Informa UK Limited, trading as Taylor & Francis Group.


  • Informal sector
  • income distribution
  • intermediate goods
  • market size
  • quality choice

ASJC Scopus subject areas

  • Development


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