Year: 2014
Type: report
Abstract: We establish five facts about the informal economy in developing countries.First, it is huge, reaching about half of the total in the poorest countries.Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs.Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector.Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth.Fourth, the informal economy is largely disconnected from the formal economy.Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement.Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life.These five facts are most consistent with dual models of informality and economic development.
DOI: 10.3386/w20205
Authors: Rafael La Porta, Andrei Shleifer
Institution: Harvard University
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3122525679