NANCY Seminar – Océane PIETRI (BETA)

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Title: Balancing Informality and Inequality in the Presence of Gender Disparities

Abstract: This paper investigates the trade-off between the reduction of informality and inequality, taking into account gender-based disparities. I use a model with heterogeneous agents, incomplete markets, and occupational choice, where households choose between being a worker, an informal entrepreneur, or a formal entrepreneur. While operating in the informal sector allows them to avoid the payment of profit tax, informal entrepreneurs face the risk of being detected by the government. Calibrated on the Brazilian economy, several experiments are conducted to assess the impact of reducing the size of the informal sector, the potential trade-off between wealth and gender inequality redistribution, and the role played by different tax instruments. Results show that a reduction in informality provokes an increase in aggregate output and consumption but increases wealth and gender inequality. However, a change in fiscal policy optimally designed to maximize welfare emphasizes that, optimally, the profit tax fails to reduce welfare and provokes an important in wealth inequality and gender disparities, while an optimal labor income tax or capital successfully reduces informality but has mixed results in reducing inequality. Moreover, I show that neglecting the role of gender-based discrimination can lead to wrongly design optimal fiscal policies.