Does the underground economy hold back financial deepening? Evidence from the Italian credit market
AbstractThe paper investigates the relationship between the underground economy and financial deepening. Entrepreneurs can only access external finance by disclosing credible information in formal documentation. This may be impossible for many informal producers, who lack proper accounting records. Similarly, irregular workers may have difficulty borrowing to finance consumption and house purchases. Using panel data on local credit markets in Italy, we find that the share of irregular employment has a strong negative impact on outstanding credit to the private sector. According to our estimates, a shift of 1 per cent of employees from regular to irregular work corresponds to a decline of 1-2 percentage points of GDP in the volume of business lending and of 0.3 percentage points in outstanding credit to households. By contrast, the feedback effects of financial deepening on the size of the informal sector are weak and statistically not significant. Applying a difference-in-difference approach that exploits the exogenous variation induced by the regularization programme for immigrant workers launched in 2002, we also find that irregular labour has a negative effect on banksÂ’ decisions to enter local credit markets.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 646.
Date of creation: Nov 2007
Date of revision:
irregular employment; bank lending; school drop-out; entry; branching; regularisation program;
Other versions of this item:
- Giorgio Gobbi & Roberta Zizza, 2007. "Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market," CEP Discussion Papers dp0789, Centre for Economic Performance, LSE.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-12 (All new papers)
- NEP-DEV-2008-01-12 (Development)
- NEP-URE-2008-01-12 (Urban & Real Estate Economics)
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