This article presents a game theoretic analysis of informality in the labor market based on an infinite dynamic game between employers and workers in which the Judiciary system enters parametrically. We find two classes of subgame-perfect Nash equilibria. In the first class, the worker first gets an informal contract but he eventually becomes a formal worker. We show that the more effective the Judiciary system, the faster the labor relationship is formalized. In the second class informal labor is maintained, coupled with high work turnover. Again, the more efficient the Judiciary system, the less likely is that equilibrium.
game theory; labor market; institutions
