Informal Labour and Credit Markets: A Survey.

relatives and friends while formal jobs require formal application processes (see SF 10).
Within the informal network, world-of-mouth communication is important and there is
no need of a formal search process. This is in contrast with Fugazza and Jacques (2003).
Satchi and Temple (2009) introduces a search-matching framework in a model of the
Harris and Todaro (1970) tradition. The authors allow for an urban sector with formal
and informal jobs and an agricultural competitive sector. As in Zenou (2008), this allows
for an endogenous outside option for workers which trade-off the higher productivity of
the urban sector with the security of a job in the agricultural sector. The main downside
of their theoretical framework is that it does not distinguishes unemployed from informal
workers and the informal sectors is seen as “marginal forms of self-employment, made
possible by low entry costs”. Workers that cannot find a job formally because of search-
frictions simply turn to the informal sector. The authors introduces endogenous capital
in the formal sector of a small open economy and recognizes the importance of a general
equilibrium analysis. Finally, Kolm and Larsen (2003) model worker’s choice to enter the
formal sector in a search-matching model where agents with different abilities have the
option to acquire education. This theoretical analysis allows for the interactions and the
endogenous determination of unemployment, informality and educational levels.

4.3 The intrafirm margin and the occupational choice

Bosch (2006) explains the rationale for the existence of both formal and informal con-
tracts within the same firm by modelling the within firm decision of employing informal
labour. Bosch (2007) generalizes the intra firm margin of informality of Bosch (2006) in
a framework with occupational choice. In particular, the author assumes that hetero-
geneous individuals sort themselves between workers, informal self-employed and formal
entrepreneurs. The latter are then able to exploit the intra-firm margins of informality by
employing, both, formal and informal labour. An increase in labour market regulations
can expand informality through the intra-firm contract decision and also by expanding
the informal self-employment. Bosch (2006 and 2007) models the intrafirm margin by
extending the basic search-matching model and allowing for ex-post match heterogeneity.
Formally, the choice of a stochastic job matching framework allows for optimal hiring
decision of the firm in function of the productivity of the match between firms and ex-

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