Informality and inequality dynamics in a two-sector Ramsey-type growth model

This thesis develops a two-sector Ramsey type growth model with heterogeneous agents in terms of their initial endowment of capital. The informality level and income/wealth distributions are generated endogenously in the model, given the tax rates for capital and labor, and tax enforcement rate. We aim to investigate the effect of informality on wealth and income inequality dynamics. We find that economies with higher informality level end up with lower capital stock and less inequality. We also introduce a skill heterogeneity to this model and investigate the effect of skill heterogeneity under different informality levels.