Informality and Access to Finance: Evidence from India

CentER Discussion Paper Series No. 2014-052

58 Pages Posted: 4 Sep 2014 Last revised: 1 Nov 2023

See all articles by Thorsten Beck

Thorsten Beck

City University London - The Business School; Tilburg University - European Banking Center, CentER

Mohammad Hoseini

Tehran Institute for Advanced Studies; Tilburg University - Center for Economic Research (CentER); Tilburg University - European Banking Center

Date Written: September 4, 2014

Abstract

This paper gauges the relationship between financial depth and outreach and informality using firm- and household-survey data from India and distinguishing between two different margins: formal vs. informal entrepreneurship and informal entrepreneurship vs. salaried work. We find evidence for three channels through which financial development can reduce informality: reducing the entry barrier to the formal sector, increasing productivity of formal firms, and reallocating informal business owners to salaried jobs in formal firms. Financial outreach, as gauged by branch penetration, has a stronger effect on reducing the incidence of informality by reducing barriers to the formal economy, especially for smaller firms. Financial depth, as measured by credit to SDP, increases the productivity of formal sector firms and facilitates a transition of informal business owners into salaried jobs in the formal sector.

Keywords: Informality, Financial Development, India

JEL Classification: G21, G28, O15, O16

Suggested Citation

Beck, Thorsten and Hoseini, Mohammad, Informality and Access to Finance: Evidence from India (September 4, 2014). CentER Discussion Paper Series No. 2014-052, Available at SSRN: https://ssrn.com/abstract=2491466 or http://dx.doi.org/10.2139/ssrn.2491466

Thorsten Beck (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Mohammad Hoseini

Tehran Institute for Advanced Studies ( email )

Iran

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

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