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Informality and Regulations

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Author Info

  • Era Dabla-Norris
  • Gabriela Inchauste

Abstract

The paper relies on a rich firm-level data set on transition economies to examine the role of informality as an important channel through which regulatory and other policy constraints affect firm growth. We find that firms reduce their formal operations with a higher tax and regulatory burden, but increase it with better enforcement quality. In terms of firm growth, we find a differential impact of regulatory burden and enforcement quality on formal and informal firms. In particular, we find that growth in formal firms is negatively affected by both tax and financing constraints, while these constraints are insignificant for growth in informal firms. Moreover, formal firm growth improves with better enforcement as measured by fair and impartial courts, while informal firm growth is constrained by organized crime, pointing to their inability to take full advantage of the legal and judicial systems. Finally, when we look at country-wide institutions, we find that higher regulatory burden reduces firm growth. An interactive term between a country-wide measure of the rule of law and a proxy for formality suggests that better enforcement quality dampens the relatively weaker growth in formal firms.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/112.

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Length: 26
Date of creation: 01 May 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/112

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Related research

Keywords: Shadow economy; Corporate sector; Tax burdens; Transition economies; regulatory burden; survey; organized crime; correlation; standard errors; statistics; correlations; independent variable; institutional development; statistic; judicial system; investment climate; tax rate; real interest rates; empirical model; business regulation; regulatory barriers; dummy variable; business disputes; fixed effects model; predictability; equation; institutional framework; tax policy; instrumental variables; investment projects; outliers; government agency; surveys;

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References

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  1. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," NBER Working Papers 8852, National Bureau of Economic Research, Inc.
  2. Simeon Djankov & Rafael La Porta & Florencio LopezdeSilanes & Andrei Shleifer, 2000. "The Regulation of Entry," NBER Working Papers 7892, National Bureau of Economic Research, Inc.
  3. Loayza, Norman V. & Oviedo, Ana Maria & Serven, Luis, 2005. "Regulation and macroeconomic performance," Policy Research Working Paper Series 3469, The World Bank.
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  5. Timothy Besley & Robin Burgess, 2002. "Can labour regulation hinder economic performance? Evidence from India," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3779, London School of Economics and Political Science, LSE Library.
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  7. Juan Botero & Simeon Djankov & Rafael Porta & Florencio C. Lopez-De-Silanes, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(4), pages 1339-1382, November.
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  10. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, Elsevier, vol. 78(2), pages 299-321, December.
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  13. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(4), pages 518-29, October.
  14. Loayza, Norman V. & Oviedo, Ana Maria & Serven, Luis, 2005. "The impact of regulation on growth and informality - cross-country evidence," Policy Research Working Paper Series 3623, The World Bank.
  15. Auriol, Emmanuelle & Warlters, Michael, 2005. "Taxation base in developing countries," Journal of Public Economics, Elsevier, Elsevier, vol. 89(4), pages 625-646, April.
  16. Schneider, Friedrich G., 2007. "Shadow economies and corruption all over the world: what do we really know?," Economics Discussion Papers 2007-9, Kiel Institute for the World Economy.
  17. Mihir Desai & Paul Gompers & Josh Lerner, 2003. "Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe," NBER Working Papers 10165, National Bureau of Economic Research, Inc.
  18. repec:reg:rpubli:271 is not listed on IDEAS
  19. 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.
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  21. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, American Finance Association, vol. 60(1), pages 137-177, 02.
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