Determination of Optimum Levels of Occupational Health and Safety in a Setting with Informal and Formal Sectors

In this paper, we aim to understand the determination of the optimum levels of occupational health and safety in a setting where firms have the outside option of working in the informal sector. We construct a theoretical model in which equilibrium labor cost is exogenous and firms have an option to decide to work in the high efficiency formal or low cost informal sector, where there is a risk of detection and zero profit if they choose to work informally. Considering the existence of a large informal sector in many developing countries, the findings of this study are of great importance.