What Causes Firms to Hide Output?: The Determinants of Informality

Dabla-Norris, Era; Gradstein, Mark; Inchauste, Gabriela

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What Causes Firms to Hide Output?: The Determinants of Informality

IMF Working Paper No. 05/160

33 Pages Posted: 3 Mar 2006

See all articles by Era Dabla-Norris

Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); World Bank - Development Research Group (DECRG)

Gabriela Inchauste

World Bank

There are 2 versions of this paper

Date Written: August 2005

Abstract

In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated dataset which contains rich information on all these aspects. Testing the channels affecting the degree of informality, we find evidence that all previously identified factors indeed play a role in driving informality. In particular, and consistent with the suggested theoretical model, we find support for the significance of the quality of the legal system.

Keywords: informal sector, determinants, institutions

JEL Classification: H26, H32, L25, O17

Suggested Citation: Suggested Citation

Dabla-Norris, Era and Gradstein, Mark and Inchauste Comboni, Maria Gabriela, What Causes Firms to Hide Output?: The Determinants of Informality (August 2005). IMF Working Paper No. 05/160, Available at SSRN: https://ssrn.com/abstract=888029