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Informality and development: The nonlinear effect

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  • Fotié, Andrée Kenne
  • Mbratana, Taoufiki

Abstract

This paper explores how the level of development affects informality. We find for 150 countries from 1996 to 2017 that the long-run relationship between the size of the informal economy and GDP per capita follows an inverted-N pattern. This nonlinear effect is heterogeneous across the conditional distribution of informality, and robust to different income-country groups and alternative specifications. Additionally, we identify rule of law and financial development as powerful determinants of informality. In terms of policy, the formation of reforms to the informal sector should take into account the country's level of development.

Suggested Citation

  • Fotié, Andrée Kenne & Mbratana, Taoufiki, 2024. "Informality and development: The nonlinear effect," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523004962
    DOI: 10.1016/j.econlet.2023.111470
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    More about this item

    Keywords

    Informality; Level of development; Nonlinearity; Panel data; Quantile regression;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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