 Inequality, persistence of the informal economy, and club convergenceWorld Development, 2021, vol. 139, issue C Abstract: Several new dualistic models have re-examined the causes of the informal economy and have made testable predictions about the long-lasting role of inequality. We test these predictions using historical indicators of inequality, dating back to the 1700s, and data on the informal economy across 138 countries over the 1991–2015 period. We find that past levels of inequality are the most salient factors explaining the size of the informal economy, while improving credit access, reducing tax burden and business costs play a minor role. These results are robust to using alternative inequality measures from various years during the 1700–1992 period, using instrumental variables, and four alternative measurements of the informal economy. Moreover, there is no evidence that the informal economy is converging to the same steady state. Instead, there is convincing evidence of club convergence. Countries with the highest levels of initial inequality are diverging from those that started with lower levels of inequality and those who have made significant redistribution. Results suggest the importance of early conditions in determining the persistence of the dual economy with important policy implications. Keywords: Informal economy; Inequality; Club convergence; Institutions (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:139:y:2021:i:c:s0305750x20303387 DOI: 10.1016/j.worlddev.2020.105211 Access Statistics for this article World Development is currently edited by O. T. Coomes More articles in World Development from Elsevier |
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