We assume that there exists a continuum of competitive firms
hiring labor and capital to produce final goods with a general
CobbeDouglas production technology. The aggregate production
can be summarized as follows:
Y ¼ AKaL1a (1)
where A is the total factor productivity, a is the capital income
share, K is the aggregate capital per capita, and L is the effective
labor per capita employed by the firms. The capital has a constant
depreciation rate of d each period. For simplicity, we assume that
firms hire both informal and formal workers