What Causes Firms to Hide Output?: The Determinants of Informality

By Era Dabla‐Norris, M. Gradstein, Gabriela Inchauste. Social Science Research Network, 2005

432 citations recorded by the source corpus.

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 data set which contains information on all these aspects. Building on a simple analytical framework, we test the channels affecting the degree of informality. We find that the quality of the legal framework is crucially important in determining the size of the informal sector, whereas the significance of taxes, regulations, and financial constraints is reduced in the context of a well functioning legal system, consistent with the presented model. Additionally, firm size is negatively correlated with the propensity to go informal; finance constraints tend to induce informality among smaller firms but not among large firms, whereas legal obstacles induce informality among larger firms.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2ebc32d59e1eae5ecb2040da45f308e2b684ec1c

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Citations in the corpus

Playing dirty or building capability? Corruption and HR training as competitive actions to threats from informal and foreign firm rivals (2016, background): “Therefore, the World Bank surveys – including the one used by us – aim to indirectly identify whether a surveyed firm is likely to have recently engaged in corruption practices across various business contexts (Dabla-Norris et al., 2008).”
Financial Development and the Underground Economy (2013, background): “(2000), Schneider and Enste (2000), Schneider (2005), Dabla Norris et al. (2005; 2008). 4 See Loyaza (1996), Friedman et al. (2000), Johnson et al.”
Value Added Taxes, Chain Effects and Informality (2010, neutral): “[5], a size gap develops.”
The Informal Sector (2007, neutral): “[2], a size gap develops.”
Is Corruption Really Bad for Inequality? Evidence from Latin America (2011, background): “Thus, if the main reason for going informal is the lack of services (Dabla-Norris et al., 2005), formalisation will allow business to take”
The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs (2012, neutral): “Moreover, they find that the owners of firms who choose to remain informal have a higher ability than formal firm owners, which differs from the mainstream view that formalization is positively correlated with the quality of the entrepreneurial input (see for instance Dabla-Norris et al., 2008; Jara”
Firm-Level Corruption in Vietnam (2012, background): “Moreover, the recent literature on firm-level determinants of informality (Dabla-Norris, Gradstein, and Inchauste 2008; McKenzie and Sakho 2010) helped in formulating the empirical specifications of the link between bribe incidence and firm informality.”
Taxing the unobservable: The impact of the shadow economy on inflation and taxation (2017, neutral): “Theoretical and empirical research, such as Ihrig and Moe (2004), Dabla-Norris, Gradstein, and Inchauste (2008), or Anderson (2012), commonly assumes and documents the fact that taxes drive firms out of the formal sector.”
Can Informal Firms Hurt Registered SMEs’ Access to Credit? (2016, neutral): “DablaNorris et al. (2008) and Ulyssea (2010) note that better legal environment and enforcement capacity raise the probability of detecting informal firms.”