Bureaucratic efficiency, economic reform and informal sector

Abstract

In this paper, we develop a four sector general equilibrium model of a small open economy with three formal sectors and one informal sector. One formal sector’s out put is used as an intermediate input in all other sectors. This intermediate input is defned here as bureaucracy. We have also incorporated an additional cost specifc to the informal sector in addition to factor cost of production which is defned as the cost of corruption. In this context, this paper examines the impact of less protection ist policy and bureaucratic reform on the output levels and factor prices. It has been shown that the informal sector and manufacturing sector have contracted due to tariff reduction while informal wage goes up. Further, we have examined the effect of a decrease in bureaucratic (in)efficiency. This reduces the informal wage rate but informal sector expands. It is further examined that the effect of a decrease in the cost of corruption leads to an increase in the informal wage rate.