| This thesis has as its main topic the analysis of the informal sector. The first chapter develops a model of industry dynamics with heterogeneous firms, endogenous entry and exit, and where firms can exploit two margins of informality: (i) whether or not to register their business; and (ii) whether formal firms may hire informal workers. The main costs and benefits from both margins of informality are associated to the existing institutions, such as the regulation of entry, labor regulation, government's enforcement technology, and taxes. Hence, in this model formal and informal are labels that define the environment where firms make their decisions, which by their turn are shaped by institutions. The model delivers predictions regarding the life-cycle behavior of some key outcomes such as the two informality margins, productivity, and size. In particular, the model predicts that size distributions within a cohort should be increasing in cohort's age, while both informality margins should be decreasing in cohort's age. These predictions are tested using two firm-level, matched employer-employee data sets on Brazilian firms.;The second Chapter aims at estimating the micro and macro impacts of reducing formal sector's entry costs and taxes, and increasing institutional enforcement in Brazil. For that, I use a simplified version of the model discussed in Chapter 1. It is an entry model with heterogeneous firms, and where firms can exploit two margins of informality mentioned above. The model is estimated using a two-step Method of Simulated Moments approach. Once the structural parameters have been estimated, the model is used to perform ex ante evaluations of the policies mentioned. The results indicate that increasing enforcement of current institutions can be effective in reducing informality but does not increase firms' and workers' welfare, nor it is the most effective strategy to increase productivity and allocative efficiency. On the other hand, reducing entry costs without increasing enforcement in the formal sector can achieve both higher levels of formalization and better aggregate outcomes, with an average gain for both firms and workers. |
