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Informality and Regulations: What Drives the Growth of Firms?

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  • Era Dabla-Norris
  • Gabriela Inchauste

Abstract

This paper relies on rich firm-level data 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 greater tax and regulatory burdens, but increase them with better enforcement quality. In terms of firm growth, we find a differential impact of regulatory burden and enforcement quality on formal and informal firm growth. In particular, we find that growth in formal firms is negatively affected by both tax and financing constraints, whereas these constraints are insignificant for growth in informal firms. Moreover, formal firm growth improves with better enforcement, while informal firm growth is constrained by organized crime, pointing to informal firms' inability to take full advantage of the legal and judicial systems. Finally, we find that an interaction term between a countrywide measure of the rule of law and formality is positive, suggesting that better rule of law improves formal firm growth. IMF Staff Papers (2008) 55, 50–82; doi:10.1057/palgrave.imfsp.9450030; published online 22 January 2008

Suggested Citation

  • Era Dabla-Norris & Gabriela Inchauste, 2008. "Informality and Regulations: What Drives the Growth of Firms?," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 50-82, April.
  • Handle: RePEc:pal:imfstp:v:55:y:2008:i:1:p:50-82
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    Cited by:

    1. World Bank & International Finance Corporation, 2013. "Doing Business 2014 : Understanding Regulations for Small and Medium-Size Enterprises," World Bank Publications, The World Bank, number 16204.
    2. Dan Andrews & Aida Caldera Sánchez & Åsa Johansson, 2011. "Towards a Better Understanding of the Informal Economy," OECD Economics Department Working Papers 873, OECD Publishing.
    3. Junko Koeda & Era Dabla-Norris, 2008. "Informality and Bank Credit; Evidence from Firm-Level Data," IMF Working Papers 08/94, International Monetary Fund.
    4. John C. Anyanwu, 2016. "Empirical Analysis of the Main Drivers of Income Inequality in Southern Africa," Annals of Economics and Finance, Society for AEF, vol. 17(2), pages 337-364, November.
    5. World Bank & International Finance Corporation, "undated". "Doing Business in the East African Community 2011," World Bank Other Operational Studies 27390, The World Bank.

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