Tax Evasion, the Quality of the Legal System, and the Difficulties of Credit Access
Posted: 26 Apr 2010
Date Written: April 2010
The article aims at estimating the impact of the quality of the legal system and of fiscal evasion on the difficulties of credit access of firms. The motivations of the study are twofold. First, the understanding of the determinants of credit market imperfections is a primary goal for economists. Indeed, credit lines are one of the main firms’ financial sources, and the presence of credit market imperfections creates situations of financial constraints and credit rationing and, consequently, a negative impact on firm actual and potential growth.
Second, the shadow economy affects all countries and there is an ongoing debate on its impact on the official economy. Our paper analyzes a specific aspect of this debate, i.e.: how the partial shadow economy affects the possibility of firms to borrow. Moreover, we improve on the existing literature by also considering the quality of the legal system in our empirical investigation. Indeed, the legal system of a country plays a relevant role in determining both the level of the shadow economy, and the efficiency of the financial markets.
We use the dataset Voices of the Firms 2000 of the World Business Environment Survey (WBES). The dataset contains firm-level data for the period 1999-2000 for about 10000 firms located in 80 different countries. The firms have been interviewed randomly, and a minimum of 100 interviews for each country have been collected.
Our findings show that both the shadow economy and the quality of the legal systems affect the difficulties of the credit access of firms. First, we find that the higher the level of the partial shadow economy is, the higher the probability that firms face difficulties of borrowing. Second, the estimates show that the quality of the legal system affects positively the possibility of firms to borrow from the financial market, and that a low level of the quality of the legal system enforces the negative impact of the tax evasion on the credit access.
Keywords: shadow economy, financial constraints, legal institutions
JEL Classification: D21, G30, O17
Suggested Citation: Suggested Citation