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Informality among Formal Firms: Firm-level, Cross-country Evidence on Tax Compliance and Access to Credit

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  • Gatti, Roberta
  • Honorati, Maddalena

Abstract

We use firm-level, cross-county data from Investment Climate surveys in 49 developing countries to investigate an important channel through which informality can affect productivity: access to credit and external finance. Informality is measured as self-reported lack of tax compliance in a sample of registered firms that also answered questions on a large set of other characteristics. We find that more tax compliance is significantly associated with more access to credit both in OLS and in country fixed effects estimates. In particular, the link between credit and formality is stronger in high-formality countries. This suggests that firms’ balance sheets are relatively more informative for financial institutions in environments where signal extraction is a less noisy process. Our results are robust to the inclusion of a wide array of correlates and to two-stage estimation.

Suggested Citation

  • Gatti, Roberta & Honorati, Maddalena, 2007. "Informality among Formal Firms: Firm-level, Cross-country Evidence on Tax Compliance and Access to Credit," CEPR Discussion Papers 6597, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6597
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    Cited by:

    1. Catalina Granda Carvajal, 2015. "Informality and macroeconomic volatility: do credit constraints matter?," Journal of Economic Studies, Emerald Group Publishing, vol. 42(6), pages 1095-1111, November.
    2. Almeida, Rita K., 2009. "Openness and technological innovation in East Asia : have they increased the demand for skills?," Social Protection Discussion Papers and Notes 51254, The World Bank.
    3. Ceyhun Elgin & Ferda Erturk, 2016. "Is Informality a Barrier to Convergence?," Economics Bulletin, AccessEcon, vol. 36(4), pages 2556-2568.
    4. Ronald Davies & Lourenço Paz, 2011. "Tariffs versus VAT in the presence of heterogeneous firms and an informal sector," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 533-554, October.
    5. Catão, Luis A. V. & Pagés, Carmen & Rosales, Maria Fernanda, 2009. "Financial Dependence, Formal Credit, and Informal Jobs: New Evidence from Brazilian Household Data," IZA Discussion Papers 4609, Institute of Labor Economics (IZA).
    6. Mónica Cueto & Erick Gómez, 2016. "Firm migration to informality and trade openness in developing countries," Economia Coyuntural,Revista de temas de perspectivas y coyuntura, Instituto de Investigaciones Economicas y Sociales 'Jose Ortiz Mercado' (IIES-JOM), Facultad de Ciencias Economicas, Administrativas y Financieras, Universidad Autonoma Gabriel Rene Moreno, vol. 1(4), pages 1-31.
    7. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.
    8. Laszlo Goerke, 2012. "The Optimal Structure of Commodity Taxation in a Monopoly with Tax Avoidance or Evasion," Public Finance Review, , vol. 40(4), pages 519-536, July.
    9. Ceyhun Elgin & Oguz Oztunali, 2014. "Institutions, Informal Economy, and Economic Development," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(4), pages 145-162.
    10. Germana Giombini & D?sir?e Teobaldelli, 2012. "The effects of tax evasion and the inefficiency of the legal system on firms? financial constraints: are they complements or substitutes?," Working Papers 1207, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
    11. Catalina Granda & Franz Hamann, 2015. "Informality, Saving and Wealth Inequality," Borradores de Economia 873, Banco de la Republica de Colombia.
    12. Ms. Junko Koeda & Ms. Era Dabla-Norris, 2008. "Informality and Bank Credit: Evidence from Firm-Level Data," IMF Working Papers 2008/094, International Monetary Fund.
    13. de la Torre, Augusto & Martínez Pería, María Soledad & Schmukler, Sergio L., 2010. "Bank involvement with SMEs: Beyond relationship lending," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2280-2293, September.
    14. Rita K. Almeida, 2010. "Openness and Technological Innovation in East Asia: Have They Increased the Demand for Skills?," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 17(1), pages 63-95, June.
    15. Fujin Zhou & Remco Oostendorp, 2014. "Measuring True Sales and Underreporting with Matched Firm-Level Survey and Tax Office Data," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 563-576, July.
    16. Ana Maria Oviedo & Mark R. Thomas & Kamer Karakurum-Ozdemir, 2009. "Economic Informality : Causes, Costs, and Policies - A Literature Survey," World Bank Publications - Books, The World Bank Group, number 5917, December.
    17. Gheorghe ZAMAN & Zizi GOSCHIN, 2016. "A New Multidimensional Ranking of Shadow Economy for EU Countries," Romanian Journal of Economics, Institute of National Economy, vol. 43(2(52)), pages 14-33, december.
    18. Beegle,Kathleen G. & Benjamin,Nancy Claire & Recanatini,Francesca & Santini,Massimiliano, 2014. "Informal economy and the World Bank," Policy Research Working Paper Series 6888, The World Bank.
    19. Coolidge, Jacqueline & Ilic, Domagoj & Kisunko, Gregory, 2009. "Small businesses in south Africa : who outsources tax compliance work and why ?," Policy Research Working Paper Series 4873, The World Bank.
    20. Giombini, Germana & Teobaldelli, Désirée & Schneider, Friedrich, 2018. "Interaction effect of tax evasion and legal system inefficiency on firms' financial constraints," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 1-20.

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    More about this item

    Keywords

    access to credit; informality;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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