Structural Informality and Economic Dynamics: A Lotka‐Volterra Model of Formal‐Informal Sector Coevolution

ABSTRACT

This paper develops a generalized Lotka‐Volterra framework for the coevolution of formal and informal economic activity, modeling both sectors as interacting populations whose growth depends on own and cross‐sector scale. Cross‐interaction parameter signs define four regimes: competitive formalization, mutual reinforcement, dependent informality, and an informal buffer. Using a panel of 157 economies over 1961–2021, full own‐and‐cross estimates identify an informal buffer, the modal classification: informal output positively predicts formal growth, while formal output negatively predicts informal growth. Cross‐only estimates instead conflate interaction with convergence. Formalization policy therefore has to consider absorption, enforcement, productivity, and compliance incentives together.