Bureaucratic reform, informal sector and welfare

In this paper we formulate a three-sector general equilibrium model where one sector produces a service or good used as an intermediate input in two other sectors. Intermediate input here resembles bureaucratic (in)efficiency/control, red-tapism etc. in light of these concerns we introduce informal sector where wage is determined through competitive mechanism. We show that informal wage must go up if bureaucratic efficiency increases in general or if informal sector becomes less prone to bureaucracy related menace. However, in the welfare front the eventual impact depends on whether labor reallocation effect can outweigh the tariff revenue effect.