Risk attitudes and informal employment in a developing economy

© 2012 Bennett et al.; licensee Springer. This is an Open Access article distributed under the terms of the Creative Commons Attribution License(http://creativecommons.org/licenses/by/2.0),which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.We model an urban labour market in a developing economy, incorporating workers’ risk attitudes. Trade-offs between risk aversion and ability determine worker allocation across formal and informal wage employment, and voluntary and involuntary self employment. Greater risk of informal wage non-payment can raise or lower informal wage employment, depending on the source of risk. Informal wage employment can be reduced by increasing detection efforts or by strengthening contract enforcement for informal wage payment. As the average ability of workers rises, informal wage employment first rises, then falls. Greater demand for formal production may lead to more involuntary self employment

Compensation for Commuting in Imperfect Urban Markets

We develop an urban equilibrium job search model with employed and unemployed individuals where residential mobility of the unemployed is restricted. We assume a standard mono-centric model (firms are located in one location), but allow for imperfect labour markets. In contrast to models with perfect labour markets, the model predicts that the employed are only partially compensated for commuting costs in the form of wages. As a result, rent gradients are less steep than predicted by standard urban theories that assume perfectly competitive labour markets. © 2007 the author(s). Journal compilation © 2007 RSAI