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
