What Causes Firms to Hide Output? the Determinants of Informality
IMF Working Papers, August 1, 2005
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Bibliographic details
- Authors: Gabriela Inchauste, Mark Gradstein, Era Dabla-Norris
- Published: August 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861792.001
Summary and main findings
- In many developing countries, a significant part of economic activity takes place in the informal sector.
- Using an integrated dataset containing information on tax and regulation burden, financial market development, and the quality of the legal system, the paper revisits determinants of the size of the informal sector.
- Testing channels affecting the degree of informality, the authors find evidence that all previously identified factors (tax and regulation burden, financial market development, quality of the legal system) play a role in driving informality.
- The analysis finds particular support for the significance of the quality of the legal system, consistent with the suggested theoretical model.
Policy-relevant implications
- Policies addressing informality should consider a broad set of factors simultaneously, including:
- Reducing tax and regulatory burdens that encourage hiding output.
- Enhancing financial market development to reduce incentives for informality.
- Strengthening the quality of the legal system to discourage informal activity.
- Integrated reforms across taxation, finance, and legal institutions are likely more effective than single-channel approaches.
Data, scope, and approach
- The study uses an integrated dataset with rich information on:
- Tax and regulation burden.
- Financial market development.
- Quality of the legal system.
- The paper tests theoretical channels affecting firms’ decisions to hide output and assesses their relative importance empirically.