Inequality and Informality

Mark Gradstein and Alberto Chong

No 5545, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through taxes and regulations lose much of their robustness in the presence of the above factors.

Keywords: Informal sector; Shadow economy; Inequality; Institutional quality (search for similar items in EconPapers)
JEL-codes: D70 O15 O17 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Inequality and informality (2007)
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