Pedro Mendi a resident fellow researcher at the Navarra Center of International Development (NCID) presented his paper on Informality and Innovation. The paper studies the relationship between competition against informal firms and innovation activities by formal firms. It makes use of the World Bank’s Enterprise Survey data. “One of the assumptions is that informal sector firms produce goods inferior to firms in the formal sector,” mentioned Pedro. “I found a positive correlation between the introduction of an innovation and intensity of competition against informal sector firms”.

 “I therefore decided to build a model of competition with vertically differentiated goods to explain the research findings,” he continued. The study then forms a model with a monopolist formal sector facing competition against informal sector firms. The question then becomes “under which conditions do monopolist firms have greater incentives to innovate?” In conclusion Pedro found that it could be the case that the formal firm has greater incentives to innovate when a competitive informal sector is present.