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Informality among Formal Firms: Firm-level, Cross-country Evidence on Tax Compliance and Access to Credit

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  • Gatti, Roberta
  • Honorati, Maddalena

Abstract

We use firm-level, cross-county data from Investment Climate surveys in 49 developing countries to investigate an important channel through which informality can affect productivity: access to credit and external finance. Informality is measured as self-reported lack of tax compliance in a sample of registered firms that also answered questions on a large set of other characteristics. We find that more tax compliance is significantly associated with more access to credit both in OLS and in country fixed effects estimates. In particular, the link between credit and formality is stronger in high-formality countries. This suggests that firms’ balance sheets are relatively more informative for financial institutions in environments where signal extraction is a less noisy process. Our results are robust to the inclusion of a wide array of correlates and to two-stage estimation.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6597.

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Date of creation: Dec 2007
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Handle: RePEc:cpr:ceprdp:6597

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Keywords: access to credit; informality;

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Citations

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Cited by:
  1. Coolidge, Jacqueline & Ilic, Domagoj & Kisunko, Gregory, 2009. "Small businesses in south Africa : who outsources tax compliance work and why ?," Policy Research Working Paper Series 4873, The World Bank.
  2. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.
  3. Ceyhun Elgin & Oguz Oztunali, 2013. "Institutions, Informal Economy and Economic Development," Working Papers 2013/03, Bogazici University, Department of Economics.
  4. Junko Koeda & Era Dabla-Norris, 2008. "Informality and Bank Credit," IMF Working Papers 08/94, International Monetary Fund.
  5. Zhou, Fujin & Oostendorp, Remco, 2011. "Measuring true sales and underreporting with matched firm-level survey and tax-office data," Policy Research Working Paper Series 5628, The World Bank.
  6. Rita K. Almeida, 2010. "Openness and Technological Innovation in East Asia: Have They Increased the Demand for Skills?," Asia Pacific Trade and Investment Review, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 17(1), pages 63-95, June.
  7. Keith Blackburn & Niloy Bosey & Salvatore Capasso, 2008. "Financial Development and the Underground Economy," Working Papers 5_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  8. Ronald Davies & Louren Paz, 2010. "Tariffs Versus VAT in the Presence of Heterogeneous Firms and an Informal Sector," The Institute for International Integration Studies Discussion Paper Series iiisdp323, IIIS, revised Mar 2010.
  9. de la Torre, Augusto & Martínez Pería, María Soledad & Schmukler, Sergio L., 2010. "Bank involvement with SMEs: Beyond relationship lending," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2280-2293, September.
  10. Goerke, Laszlo, 2011. "The optimal structure of commodity taxation in a monopoly with tax avoidance or evasion," University of Tuebingen Working Papers in Economics and Finance 8, University of Tuebingen, Faculty of Economics and Social Sciences.
  11. Germana Giombini & Désirée Teobaldelli, 2012. "The effects of tax evasion and the inefficiency of the legal system on firms’ financial constraints: are they complements or substitutes?," Working Papers 1207, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  12. Ana Maria Oviedo & Mark R. Thomas & Kamer Karakurum-Ozdemir, 2009. "Economic Informality : Causes, Costs, and Policies - A Literature Survey," World Bank Publications, The World Bank, number 5917, October.

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