Bureaucratic efficiency, economic reform and informal sector

In this paper, we develop a four sector general equilibrium model of a small open economy with three formal sectors and one informal sector. One formal sector's output is used as an intermediate input in all other sectors. This intermediate input is defined here as bureaucracy. We have also incorporated an additional cost specific to the informal sector in addition to factor cost of production which is defined as the cost of corruption. In this context, this paper examines the impact of less protectionist policy and bureaucratic reform on the output levels and factor prices. It has been shown that the informal sector and manufacturing sector have contracted due to tariff reduction while informal wage goes up. Further, we have examined the effect of a decrease in bureaucratic (in)efficiency. This reduces the informal wage rate but informal sector expands. It is further examined that the effect of a decrease in the cost of corruption leads to an increase in the informal wage rate.