Essays on barriers to entrepreneurship and informality
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Abstract
In Chapter 1, we develop a dynamic heterogeneous agents model that endogenously links racial wage gaps to racial asymmetries in entrepreneurship. In the model, white and nonwhite workers with different education levels choose between employment and entering entrepreneurship, given their accumulated assets and race-specific wages. Calibrating the model to the Brazilian economy, we show that in general equilibrium reducing the racial wage gap translates into aggregate economic gains as it reduces the misallocation of talent in the economy.
Chapter 2 studies the implications of tax evasion in the context of a size-based tax system in Brazil that alleviates the tax burden for small firms. Because eligibility is based on a size cutoff, the tax system may provide incentives for firm owners to keep their businesses small. I document firm splitting patterns that are suggestive of strategic tax evasion by firm owners to gain access to the tax system. States charging higher taxes for companies that are not in the system feature a larger measure of firm splits. I develop a model to rationalize the choice of firm splitting, calibrated to match empirical facts describing the Brazilian retail trade sector. The model predicts that tax evasion via firm splitting have negligible effects on TFP at the cost of large tax revenue losses.
In Chapter 3, we study the role of the informal sector as an employment and consumption buffer at times of economic distress. We document its pro-cyclical nature: the share of informal workers increases when GDP per capita falls and unemployment rates soar. We also estimate the earnings premium from formalization and how it varies with workers' educational level. Then, we develop a heterogeneous agents model with endogenous job search that incorporates the features of the Brazilian formal and informal labor markets. We show that informality may increase average marginal propensities to consume, amplifying aggregate consumption responses to economic shocks, in spite of reducing equilibrium unemployment rates.