dard assumptions in the search-matching literature (i.e. linear utility function among the
other), exclude the consumption-hours decision which is at the heart of more comprehen-
sive models of informal behavior. In this section we summarize the literature advances
in the general equilibrium environment with informality. First, we look at the way Com-
putable General Equilibrium (CGE) models include an informal sector. Second, we look
at simple dynamic general equilibrium models with wage (and price) flexibility. Third,
we look at the literature that studies the long-term impact of informality adopting an
endogenous growth framework. Finally, we review the analysis of informality embedded
in New Keynesian set ups with price and wage rigidities.
6.1 Informality in Computable General Equilibrium models
Sinha (2005) Sinha and Adam (2000), Gibson and Kelley (1994) and Portes et al. (1989)
analyse the informal sector in a macroeconomic framework using a computable general
equilibrium (CGE) structure. CGE modelling, also referred as AGE (Applied General
Equilibrium) models, use actual data to estimate the impact of mainly technological and
policy changes within a database consisting of input-output table, elasticities, etc. This
kind of modelling strategies were often used for developing countries where time series data
were scarce. Compared with the more recent general equilibrium modelling strategies, the
CGE models are mainly static (i.e. they model the reactions of the economy at one point in
time). Sinha (2005) provides a ‘mini’ survey on CGE models including an informal sector
and differentiates CGE models focusing on informality in product markets Gibson and
Kelley (1994) and CGE models based on segmented labour market theories (e.g.,Portes
et al. (1989)) where informality is defined in respect to the factor markets.
6.2 Informality and Dynamic General Equilibrium models with wage
flexibility
Agenor and Montiel (1996) introduces a series of simple macroeconomic models which
are then used in Marjit and Kar (2008) for various policy experiments with an informal
labour market. The authors model capital mobility between formal and informal sectors
with the purpose to analyze the impact of deregulation on informal wages. The intuition
is the following: in developing countries people cannot afford to be unemployed so if they
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