Effect of subsidy and entry into the informal sector with interlinkage

The present paper focuses on the dualism that exists within the industrial sector. It develops a model of informal sector incorporating its linkage with the formal sector. In this paper the products of the two sectors are imperfect substitutes as products of informal firms are deemed to be of inferior quality compared to the formal sector product. Also the formal sector producer is the dominant producer whereas the informal producers constitute a competitive fringe. In this framework the effect of entry within the informal sector and the effect of a subsidy provided to the informal producers are studied.