Informality Among Formal Firms: Firm-Level, Cross-Country Evidence on Tax Compliance and Access to Credit

37 Pages Posted: 20 Apr 2016

See all articles by Roberta Gatti

Roberta Gatti

World Bank - Development Research Group (DECRG)

Maddalena Honorati

Università Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

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Date Written: January 1, 2008

Abstract

The authors 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. The authors 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. The authors' results are robust to the inclusion of a wide array of correlates and to two-stage estimation.

Keywords: Access to Finance, Banks & Banking Reform, Debt Markets, Bankruptcy and Resolution of Financial Distress

Suggested Citation

Gatti, Roberta and Honorati, Maddalena, Informality Among Formal Firms: Firm-Level, Cross-Country Evidence on Tax Compliance and Access to Credit (January 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1083904

Roberta Gatti

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Maddalena Honorati (Contact Author)

Università Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy

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