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Open Access Original article

Risk attitudes and informal employment in a developing economy

John Bennett12*, Matthew Gould3 and Matthew D Rablen12

Author Affiliations

1 Department of Economics and Finance, and CEDI, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK

2 IZA, Bonn, Germany

3 Westminster Business School, University of Westminster, 35 Marylebone Road, London, NW1 5LS, UK

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IZA Journal of Labor & Development 2012, 1:5  doi:10.1186/2193-9020-1-5

Published: 28 December 2012

Abstract

We model an urban labour market in a developing economy, incorporating workers’ risk attitudes. Trade-offs between risk aversion and ability determine worker allocation across formal and informal wage employment, and voluntary and involuntary self employment. Greater risk of informal wage non-payment can raise or lower informal wage employment, depending on the source of risk. Informal wage employment can be reduced by increasing detection efforts or by strengthening contract enforcement for informal wage payment. As the average ability of workers rises, informal wage employment first rises, then falls. Greater demand for formal production may lead to more involuntary self employment.

JEL Classification

O17, J23, D81

Keywords:
Risk attitudes; Informality; Self employment