What determines the size of the informal economy? : an empirical evaluation of the role of institutions

Almabrok, Jaballa M. J.

Abstract

The informal economy comprises all economic activities that are unregistered or unregulated by the state. In the past 40-50 years the informal economy has grown globally and its emergence has implications for economic development and the formal economy. In recent times, a number of perspectives have emerged to explain what determines informality. One such perspective is the neoliberal explanation of informality, which has shifted the debate about informality towards the role of institutions. This dissertation assesses the neoliberal view that the informal economy is greater in economies with higher tax rates, a higher regulatory burden and a weaker rule of law. The importance of these institutional factors in explaining the rise of the informal economy is empirically evaluated by employing two types of analysis and data sets. Firstly, panel data analysis is used to examine the relationship between macro level measures of informality and institutional factors for a sample of 90 countries. The second empirical approach uses a comprehensive firm-level data set for 43 countries to estimate an ordered probit model. The findings support the neoliberal argument that the informal economy is larger when tax rates are higher, when there is greater regulatory burden and when there is an inefficient and corrupt public sector. The solution to the problem of informality, therefore, should focus on improving aspects of governance and enhancing the quality of the regulatory framework for business.

Citation

Almabrok, J. M. J. What determines the size of the informal economy? : an empirical evaluation of the role of institutions. (Thesis). University of Hull. https://hull-repository.worktribe.com/output/4223317

• Thesis Type: Thesis
• Deposit Date: Aug 6, 2021
• Publicly Available Date: Feb 23, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4223317
• Additional Information: Business School, The University of Hull
• Award Date: Oct 1, 2017