Financial Dependence, Formal Credit and Informal Jobs

41 Pages Posted: 21 Apr 2011

See all articles by Luis A. V. Catão

Luis A. V. Catão

Inter American Development Bank

Carmen Pages

Inter-American Development Bank (IADB); IZA Institute of Labor Economics

Maria R. Rosales

affiliation not provided to SSRN

Date Written: December 2009

Abstract

This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. The relevance of this credit channel is gauged using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil. It is found that formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. Also found is that, decomposing shifts in formalization rates into those within each firm size category and those between firm sizes, financial deepening significantly explains the former but not so much the latter. Some key policy implications are derived.

Suggested Citation

Catão, Luis A. V. and Pages-Serra, Carmen and Rosales, Maria R., Financial Dependence, Formal Credit and Informal Jobs (December 2009). IDB Working Paper No. 33. Available at SSRN: https://ssrn.com/abstract=1817195 or http://dx.doi.org/10.2139/ssrn.1817195

Luis A. V. Catão (Contact Author)

Inter American Development Bank ( email )

Carmen Pages-Serra

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States
202-623 3110 (Phone)
202-623-2481 (Fax)

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Maria R. Rosales

affiliation not provided to SSRN ( email )

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