Development and welfare in the presence of an urban informal sector: a three-sector general equilibrium approach

Existing theoretical models on the urban informal sector (UIS) are extensions of the Harris-Todaro (H-T) framework of rural-urban migration. Thus the models are partial equilibrium in nature stressing the supply-side adjustments; and policy ranking is guided by an SWF which is solely based on greater resource utilization in terms of unemployment reduction. The present paper allows UIS development to be spontaneous, unlike most H-T-type models. The model also emphasizes that general equilibrium modelling highlights the importance of demand-side adjustments along with supply-side; and that policy ranking should try to admit the hazardous aspect of UIS which might be independent of the unemployment problem in the economy and as such makes the H-T-type model conclusions ambiguous.