Can the digital economy development limit the size of the informal economy? A nonlinear analysis based on China's provincial panel data

Jiamin Lv, Shi Li, Mengying Zhu and Wenli Huang

Economic Analysis and Policy, 2024, vol. 83, issue C, 896-921

Abstract: This paper investigates whether and how digital economy (especially digital platforms and digital finance) restrains the informal economic activities in China measured by the MIMIC (multiple indicators multiple causes) model. Using Chinese provincial panel data from 1995 to 2020, we find that the average size of China's provincial informal economy displays a five-stage fluctuation, ranging from 13.63 % to 17.53 %. More importantly, we uncover a robust “inverted U-shaped” nonlinear relationship between the digital platform development and the informal economy, with a turning point of 0.4189. Initially, the development of digital platforms increases informal economic activities by disrupting traditional sectors, causing new types of tax evasion, challenging regulators and raising digital crime. However, beyond a certain threshold, digital platforms can overcome these problems through more job creations and improved regulation. Meanwhile, the digital financial development is proved to have a negative impact on the informal economy because it can offer much more advantages in addressing informality such as making payments transparent, easing credit constraints, raising total income, helping governments reach people and businesses. Our study provides convincing evidence and valuable advice for policymakers when developing digital economy to curb the informal economy.

Keywords: Informal economy; Digital economy; Digital finance; MIMIC; Nonlinear analysis (search for similar items in EconPapers)
JEL-codes: C33 E26 G20 O17 O30 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:83:y:2024:i:c:p:896-921

DOI: 10.1016/j.eap.2024.07.022

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