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Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market

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Author Info
Giorgio Gobbi
Roberta Zizza

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Abstract

The paper investigates the relationship between underground activities and financial deepening. Theaccess to external finance requires entrepreneurs to disclose credible information through formaldocumentation. This requirement may be impossible to oblige to for many informal producers wholack a proper book-keeping of their operations. For the same reason irregular workers may finddifficult to borrow for financing both consumption and housing purchase. Using panel data on Italianregional credit markets we find a strong negative impact of the share of irregular employment onoutstanding credit to the private sector. According to our estimates a shift of 1 per cent of theemployees from regular activities to irregular ones corresponds to a decline of about 2 percentagepoints in the volume of business lending and of 0.3 percentage points in outstanding credit tohouseholds, both expressed as ratios to GDP. Conversely, the feedback effects from financialdeepening to the size of the informal sector are weak and statistically not significant. Through adifference-in-difference approach exploiting the regularisation program for immigrant workerslaunched in 2002 we also identify a negative effect of the irregular labour on banks' entry decisions inthe local credit markets, now defined in terms of provinces.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0789.

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Date of creation: Apr 2007
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Handle: RePEc:cep:cepdps:dp0789

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Related research
Keywords: irregular employment; bank lending; school drop-out; entry; branching; regularisationprogramme;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. L. Rachel Ngai & Roberto M. Samaniego, 2006. "An R&D-Based Model of Multi-Sector Growth," CEP Discussion Papers dp0762, Centre for Economic Performance, LSE. [Downloadable!]
  2. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2006. "Multi-Product Firms and Trade Liberalization," NBER Working Papers 12782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Buiter, Willem H., 2007. "Seigniorage," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(10), pages 1-49. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Milo Bianchi & Paolo Buonanno & Paolo Pinotti, 2008. "Do immigrants cause crime?," PSE Working Papers 2008-05, PSE (Ecole normale supérieure), revised Nov 2008. [Downloadable!]
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