Should informal sector be subsidised?

3. The unit cost function,Cj(.) has three basic properties: it is negatively sloped
and its slope is equal to -Kj/Lj , it is concave and it is linearly homogenous in
factor prices(see Khan and Naqvi,1983).

4. We find this type of capital mobility in Chandra and Khan(1993).

Appendix

The total differentials of Equations (10),(11) and (12) are given by:

WudLu +WidLi +WrdLr = (L- Lr)dWr - LidWi - LudWu ..........................(15);

kudLu + kidLi +krdLr = dK -Lu dku -Li dki -Lr dkr .........................(16); and

dLu +dLi + dLr = --dU         ...................................................... (17).

The matrix form of these equations is :

(L Lr) dWr Li dWi Lu dWu
dK Lu dku Lidki Lr dkr

--dU

Let D be the determinant of the co-efficient matrix of the endogenous variables in the
system. So,we can write,

D = (Wr -Wi) ku -(Wu - Wi)kr + (Wu - Wr) ki

If ku > ((Wu- Wi)/(Wr -Wi))kr, then, D >0

Hence, dLu = 1/D(((L -Lr) dWr -Li dWi - Lu dWu) (ki -kr) -(dK -Lu dku -Li dki -

Lrdkr) (Wi -Wr) - dU (Wi kr -Wr ki)).................................(A.1)

dLi = 1/D (((dK - Lu dku -Li dki -Lr dkr )(Wu -Wr) + (Wukr -Wrku ) dU -

((L -Lr) dWr -LidWi -Lu dWu) (ku -kr)..............................(A.2)

dLr = 1/D (((L -Lr) dWr -- Li dWi -LudWu ) -(dK - Ludku -Lidki -

Lrdkr)(Wu -Wi) + (Wiku - Wuki ) dU)............................(A.3)

Effect of a change in Pi

Put dWi =dK =0 in the expressions (A.1), (A.2) and (A.3) and we get,

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