Informal sector in general equilibrium: welfare effects of trade policy reforms

Abstract

The paper demonstrates the welfare effects of trade policy reforms in a general equilibrium framework, in the presence of an informal sector in the economy. The methodology we developed in the paper allows us to use a full-employment model with wage differential. Tariff cuts in this model have ambiguous effects because of the preexisting wage differential and due to the cross-effects in the three-good structure, which is used in some recent works in trade theory. Complementarity in production may lead to negative welfare effects despite improvements in terms of trade.