Institutional Quality and Development: On the Role of Informality

31 Pages Posted: 3 Jun 2019

See all articles by Justin T Callais

Justin T Callais

Texas Tech University - Free Market Institute; Texas Tech University, College of Agricultural Sciences and Natural Resources, Department of Agricultural and Applied Economics, Students

Israt Jahan

Texas Tech University

Jamie Bologna Pavlik

Texas Tech University - Department of Agricultural and Applied Economics

Date Written: May 12, 2019

Abstract

While some view the informal economy as parasitic, others view it in a more positive light. We argue that the effect of the informal economy on development depends on both the size of the locale and the institutional environment. Good institutions facilitate productive activity and voluntary exchange when informal networks are insufficient. Using data from 5,505 Brazilian municipalities, we analyze the relationship between (formal) institutions, informality, and development. We find that formal institutions and informal production tend to be substitutable in areas with large populations, and complementary in small municipalities. Our results highlight the importance of informal networks to economic development, especially in small locales.

Keywords: Informal sector, shadow economy, institutions, development

JEL Classification: O1, O17, H11

Suggested Citation

Callais, Justin and Jahan, Israt and Bologna Pavlik, Jamie, Institutional Quality and Development: On the Role of Informality (May 12, 2019). Available at SSRN: https://ssrn.com/abstract=3387070 or http://dx.doi.org/10.2139/ssrn.3387070

Justin Callais

Texas Tech University - Free Market Institute ( email )

Box 45059
Lubbock, TX 79409-5059
United States

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

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

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