abstract
A stylized fact of the labour market in developing countries is that it is highly segmented
in informality. One of the main factors that induce workers and firms into informality is
an excessive regulatory system that makes formal economy little attractive. This study
aims to analyze the dynamics of workers and firms’ entrance and withdrawal of the formal
and informal economy, assessing the impact of taxes by using an evolutionary game theory
approach in which economic agents decide for one these markets according to the expected
pay-off. Moreover, the optimal relation between regulatory and enforcement action by the
government is evaluated.