Extortion and Informal Sector in a Competitive Trade Model

Informal fragment of the economy involving unrecorded, unregistered, extra-legal activities employs majority of the work force particularly in the developing world. The developed part of the world is also not devoid of similar segment of activities. Such extra-legal existence of informal production is facilitated through extortion by agents of political forces in power. It is also interesting to note that, extortion activities themselves constitute an informal segment. Full-scale general equilibrium consequences of such institutions are rarely discussed in the literature. So, this chapter takes up this task. I develop a well-specified general equilibrium model to explore the possible consequences of economic reform in this scenario. I explore why economic reform may have an expansionary effect on the number of extortionists. It is also unearthed that depending on capital mobility and factor intensity assumptions informal output and informal wage may increase.