Informality and Regulations: What Drives Firm Growth?

 
Author/Editor: Dabla-Norris, Era ; Inchauste, Gabriela
 
Publication Date: May 01, 2007
 
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Summary: The paper relies on a rich firm-level data set on transition economies to examine the role of informality as an important channel through which regulatory and other policy constraints affect firm growth. We find that firms reduce their formal operations with a higher tax and regulatory burden, but increase it with better enforcement quality. In terms of firm growth, we find a differential impact of regulatory burden and enforcement quality on formal and informal firms. In particular, we find that growth in formal firms is negatively affected by both tax and financing constraints, while these constraints are insignificant for growth in informal firms. Moreover, formal firm growth improves with better enforcement as measured by fair and impartial courts, while informal firm growth is constrained by organized crime, pointing to their inability to take full advantage of the legal and judicial systems. Finally, when we look at country-wide institutions, we find that higher regulatory burden reduces firm growth. An interactive term between a country-wide measure of the rule of law and a proxy for formality suggests that better enforcement quality dampens the relatively weaker growth in formal firms.
 
Series: Working Paper No. 07/112
Subject(s): Shadow economy | Industrial policy | Corporate sector | Tax burdens | Transition economies

Author's Keyword(s): Firm growth | informality | business environment | transition countries
 
English
Publication Date: May 01, 2007
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2007112 Pages: 26
Price:
US$18.00 (Academic Rate:
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