Firm Heterogeneity, Informal Wage and Good Governance

13 Pages Posted: 20 Oct 2012

See all articles by Saibal Kar

Saibal Kar

Centre for Studies in Social Sciences, Calcutta; Institute of Labor Economics (IZA)

Date Written: November 2012


This paper provides an analysis of enforcement policies applicable to formal sector in dual labor markets, using a framework with heterogeneous firms, endogenous determination of informal wage, and politically dictated enforcement strategies. Firms that operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects, particularly when workers are productively homogeneous. For firms operating exclusively in the informal sector, the outcome is different. Such features determine the stringency of enforcement in a market characterized by firms with varying levels of productivity. For example, in the case of firms with relatively high levels of productivity, enforcement has to be stricter than in the case with relatively low productivity firms. Taxing the more productive seems to be the optimal strategy.

Suggested Citation

Kar, Saibal, Firm Heterogeneity, Informal Wage and Good Governance (November 2012). Review of Development Economics, Vol. 16, Issue 4, pp. 527-539, 2012, Available at SSRN: or

Saibal Kar (Contact Author)

Centre for Studies in Social Sciences, Calcutta ( email )

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Institute of Labor Economics (IZA) ( email )

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