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Informal Sector and Economic Growth: The Supply of Credit Channel

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  • Massenot, Baptiste
  • Straub, Stéphane

Abstract

A standard view holds that removing barriers to entry and improving judicial enforcement would reduce informality and boost investment and growth. We show, however, that this conclusion may not hold in countries with a concentrated bank- ing sector or with low financial openness. When the formal sector becomes larger in those countries, more entrepreneurs become creditworthy and the higher pres- sure in the credit market increases the interest rate. This reduces future capital accumulation. We show some empirical evidence consistent with these predictions.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 685.

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Date of creation: Sep 2011
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Handle: RePEc:ide:wpaper:24945

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  1. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
  2. David Kaplan & Eduardo Piedra & Enrique Seira, 2007. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Working Papers 0701, Centro de Investigacion Economica, ITAM.
  3. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
  4. Miriam Bruhn, 2011. "License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February.
  5. António Antunes & Tiago Cavalcanti & Anne Villamil, 2006. "The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development," SCAPE Policy Research Working Paper Series 0610, National University of Singapore, Department of Economics, SCAPE.
  6. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  7. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
  8. Magda Bianco & Tullio Jappelli & Marco Pagano, 2001. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," CSEF Working Papers 58, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Apr 2002.
  9. Auriol, Emmanuelle & Warlters, Michael, 2004. "Taxation Base in Developing Countries," IDEI Working Papers 292, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2011. "Entry regulation and business start-ups: Evidence from Mexico," Journal of Public Economics, Elsevier, vol. 95(11), pages 1501-1515.
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Cited by:
  1. Ceyhun Elgin & Burak Uras, 2013. "Is informality a barrier to financial development?," SERIEs, Spanish Economic Association, vol. 4(3), pages 309-331, August.

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