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Informality, Infrastructure Investments, and New Firms’ Creation: The Location Strategy

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Abstract

This paper examines how government investments in infrastructure affect new firms’ creation and location. We analyze two scenarios. With an optimizing government, optimal location is a function of government expenditures in infrastructure. With a passive government, optimal location is independent of government expenditures in infrastructure. Productivity effects in the formal sector, as contrasted with informal sector, yield a greater impact on the formation of capital stock, and shadow price of location. The impact of fees on informal firms and taxes of formal firms affect output and welfare. With an optimizing government, entrepreneurs in the formal sector will have higher output and welfare; with a passive government, it is likely that the welfare of informal entrepreneurs is smaller than the one of formal entrepreneurs.

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Notes

  1. Long run stability of equilibrium is warranted by solving for s the following restriction [not considered in the paper]: \({L}_{t}{s}_{t}-\aleph \left({s}_{t}\right)=z{L}_{t}(1-\frac{{L}_{t}}{Q})\). Note that on the sigmoid on the left-hand side, Q is the carrying capacity of the environment in sustaining the expansion of L.

  2. More on the Tobin’s q and Tobin’s equilibrium can be found in Kaldor (1966) and Tobin and Brainard (1977).

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Authors and Affiliations

  1. Department of Economics, Florida Atlantic University, Boca Raton, FL, USA

    João Ricardo Faria

  2. Department of Economics, Copenhagen Business School, Frederiksberg, Denmark

    Mauricio Prado

  3. Department of Management and Economics & NECE – Research Unit in Business Sciences, University of Beira Interior, Covilha, Portugal

    João J. Ferreira

Authors
  1. João Ricardo Faria
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  2. Mauricio Prado
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  3. João J. Ferreira
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Correspondence to João J. Ferreira.

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Faria, J.R., Prado, M. & Ferreira, J.J. Informality, Infrastructure Investments, and New Firms’ Creation: The Location Strategy. J Knowl Econ 13, 321–331 (2022). https://doi.org/10.1007/s13132-021-00727-8

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