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What causes firms to hide output? The determinants of informality

  • Dabla-Norris, Era
  • Gradstein, Mark
  • Inchauste, Gabriela

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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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 85 (2008)
Issue (Month): 1-2 (February)
Pages: 1-27

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Handle: RePEc:eee:deveco:v:85:y:2008:i:1-2:p:1-27
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  17. Yoshiaki Azuma & Herschel I. Grossman, 2002. "A Theory of the Informal Sector," Working Papers 2002-07, Brown University, Department of Economics.
  18. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June.
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