Is the Devil in the Shadow? The Effect of Institutional Quality on Income

54 Pages Posted: 22 Aug 2019 Last revised: 26 May 2020

See all articles by Israt Jahan

Israt Jahan

Texas Tech University

Jamie Bologna Pavlik

Texas Tech University - Department of Agricultural and Applied Economics

Ryan Williams

Texas Tech University, College of Agricultural Sciences and Natural Resources, Department of Agricultural and Applied Economics, Students

Date Written: May 26, 2020

Abstract

The positive relationship between institutional quality and “official” income is well-documented. It is unclear, however, if this relationship holds once the “unofficial” economy is accounted for. An improvement in institutional quality tends to shift production out of the shadow and into the official sector, resulting in an increase in official income. However, this shift comes at the expense of the informal economy, potentially negating the perceived gains in output. This paper uses data from 5,506 Brazilian municipalities to explore the effects of institutional quality on total income per-person. We additionally estimate the effect of institutions on informal sector size. Our most robust finding suggests that higher quality institutions using our broadest measure are significantly related to development. While good institutions do decrease the size of the informal sector, the consequential switch to formality raises overall productivity.

Keywords: informal sector, shadow economy, institutions, development

JEL Classification: O1, O17, H11

Suggested Citation

Jahan, Israt and Bologna Pavlik, Jamie and Williams, Ryan, Is the Devil in the Shadow? The Effect of Institutional Quality on Income (May 26, 2020). Available at SSRN: https://ssrn.com/abstract=3379061 or http://dx.doi.org/10.2139/ssrn.3379061

Israt Jahan

Texas Tech University ( email )

Box 42132
Lubbock, TX 79409-2132
United States
8067783496 (Phone)

Jamie Bologna Pavlik (Contact Author)

Texas Tech University - Department of Agricultural and Applied Economics ( email )

Box 42132
Lubbock, TX 79409-2132
United States

Ryan Williams

Texas Tech University, College of Agricultural Sciences and Natural Resources, Department of Agricultural and Applied Economics, Students ( email )

Box 42132
Lubbock, TX 79409-2132
United States

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