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Reform, Informal Sector and Extortion

Mandal, Biswajit and Marjit, Sugata and Beladi, Hamid (2014): Reform, Informal Sector and Extortion.

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Abstract

Informal economy involving unrecorded, unregistered, extra legal activities employs majority of the workforce in the developing world. Such extra legal existence of informal production is facilitated through extortion by agents of political forces in power. Also extortion activities themselves constitute an informal segment. Full scale general equilibrium consequences of such institutions are rarely discussed in the literature. We develop a well specified general equilibrium model to explore the possible consequences of reform. Economic reform may have an expansionary effect on the number of extortionists. Depending on capital mobility and factor intensity assumptions informal output and informal wage may increase.

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