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What Causes Firms to Hide Output? the Determinants of Informality

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  • Gabriela Inchauste
  • Mark Gradstein
  • Era Dabla-Norris

Abstract

In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated dataset which contains rich information on all these aspects. Testing the channels affecting the degree of informality, we find evidence that all previously identified factors indeed play a role in driving informality. In particular, and consistent with the suggested theoretical model, we find support for the significance of the quality of the legal system.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/160.

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Length: 33
Date of creation: 01 Aug 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/160

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Keywords: Economic models; Production; survey; business environment; regulatory burden; probability; firm size; small firms; predictions; statistics; dummy variable; correlation; size of firms; surveys; standard errors; dummy variables; empirical model; equation; correlations; financial institutions; equations; prediction; independent variable; small enterprises; standard deviation; sample bias; predictability; econometrics; public enterprises; samples; government agency; discrete change; cross-country variation;

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References

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  1. Yoshiaki Azuma & Herschel I. Grossman, 2002. "A Theory of the Informal Sector," Working Papers 2002-07, Brown University, Department of Economics.
  2. RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1335-1356, December.
  4. Auriol, Emmanuelle & Warlters, Michael, 2004. "Taxation Base in Developing Countries," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 292, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  6. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 1-37, February.
  7. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, Springer, vol. 9(3), pages 271-303, 09.
  8. Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper, Federal Reserve Bank of Richmond 99-07, Federal Reserve Bank of Richmond.
  9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 77-114, March.
  10. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, Elsevier, vol. 76(3), pages 459-493, June.
  11. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  12. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, National Bureau of Economic Research, Inc, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  13. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 45(1), pages 129-162, December.
  14. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 101, Edinburgh School of Economics, University of Edinburgh.
  15. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc.
  16. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  17. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 387-92, May.
  18. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  19. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  20. Era Dabla-Norris & Andrew Feltenstein, 2005. "The underground economy and its macroeconomic consequences," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(2), pages 153-174.
  21. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 630-46, June.
  22. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2000. "A New Database on the Structure and Development of the Financial Sector," World Bank Economic Review, World Bank Group, World Bank Group, vol. 14(3), pages 597-605, September.
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