Efficient informal trade: Theory and experimental evidence from the Cape Town taxi market
2015 (English)In: Journal of Development Economics, ISSN 0304-3878, Vol. 115, 85-98 p.Article in journal (Refereed) Published
Informal sectors in developing countries are often thought of as responses to rigid and cumbersome market regulations. In this paper I study informal trade as a first-best outcome. In the model I propose rigid regulations can be necessary to achieve efficiency even though they are always sidestepped. The key assumption is that the regulations define the trading parties' fall-back position in case the informal bargaining process breaks down. I set up a field experiment to test the model's mechanisms in the Cape Town market for metered taxis. Consistent with the model, I find that sidestepping the regulations increase cost efficiency (taxis take the shortest route). The price is however unaffected, suggesting informal bargaining leads to a Pareto improvement.
Place, publisher, year, edition, pages
2015. Vol. 115, 85-98 p.
IdentifiersURN: urn:nbn:se:uu:diva-256111DOI: 10.1016/j.jdeveco.2015.02.003ISI: 000354583600007OAI: oai:DiVA.org:uu-256111DiVA: diva2:825787