informal firms cannot access external financing, advertise, nor expand to an economically efficient


To verify the robustness of our findings, we also implement Gasparini and Tornarolli’s

(2009, 18-19) definition of productive informality. Under this definition workers are separated into

seven categories indicative of productive circumstances: (1) entrepreneurs, (2) salaried workers in

large private firms, (3) salaried workers in the public sector, (4) salaried workers in small private

firms, (5) skilled self-employed, (6) unskilled self-employed and (7) zero-income workers.

Entrepreneurs are classified as individuals who directly employ others and small private firms are

defined as having five or fewer workers. This measure is also a dichotomous variable equal to 1 if

a worker belongs to categories (4), (6) and (7) and 0 if otherwise. 10

Given that the legalistic definition is concerned with the wellbeing of workers, and that

some of the categories used in the productive definition can be used to understand heterogeneous

effects, we rely primarily on the legalistic definition.

2.3 Informality in Peru

Indigenous Peruvians face fewer opportunities for education, income and health (Ñopo

2012; Hall and Patriños 2006). Some of these disadvantages are viewed as part of the region’s

larger legacy of colonialism and exclusionary institutions (Engerman and Sokoloff 2001). Recent

empirical literature has made some progress in quantifying the role of discrimination and


The traditional definition also has its limitations, in particular the classification of

entrepreneurs as formal given that they could be self-employed or operate in conditions of

limited productivity, but hiring some number of workers.


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