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Modeling functional and juridical informality: a guide for data-driven policy

ABSTRACT This paper reviews a methodology for integrating the informal sector into social accounting matrices and a simple computable general equilibrium model. The model distinguishes informality according to whether the presence of the informal sector is due to capital limitations, functional informality, versus juridical informality, which may arise as an illegal or quasi-legal competitive strategy that runs the risk of state sanctions. The goal is to offer policymakers some perspectives on how the informal sector could be incorporated into the economy without first repressing it in a way that inhibits its transformation.