ABSTRACT
In this chapter, the authors present the review of the literature and define the hypothesis of their model. They also present the data set and their econometric model. Egypt is an interesting example showing the complexities of the informal sector. The authors discuss the main econometric results. Informal competition is considered as a threat to the economy. Empirical studies tackling informal competition assumed by default its harmfulness trying to identify the main characteristics of formal firms that make them more or less vulnerable to informal competition. Under certain conditions informal competition pushes formal firms to boost their productivity to overcome informal firms’ advantage in cost by better allocating unused resources. In countries with large informal sectors, the implementation of effective reforms and regulation allows for the reduction of the cost differential between formal and informal firms, enabling formal firms to improve their productivity and regain their market shares.
