An industry is modeled in which entrepreneurs, who are heterogeneous in ability, may produce formally or informally. It is shown how the formal-informal mix depends on the distribution of ability, product demand and various parameter values...

We model decisions with respect to formality or informality for entrepreneurs in a newindustry for a developing economy. We show that informality allows a leader to explore,without significant sunk costs, the potential profitability of the industry; that is, informality maybe a stepping stone,...