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Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market

Giorgio Gobbi () and Roberta Zizza ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: The paper investigates the relationship between underground activities and financial deepening. The access to external finance requires entrepreneurs to disclose credible information through formal documentation. This requirement may be impossible to oblige to for many informal producers who lack a proper book-keeping of their operations. For the same reason irregular workers may find difficult to borrow for financing both consumption and housing purchase. Using panel data on Italian regional credit markets we find a strong negative impact of the share of irregular employment on outstanding credit to the private sector. According to our estimates a shift of 1 per cent of the employees from regular activities to irregular ones corresponds to a decline of about 2 percentage points in the volume of business lending and of 0.3 percentage points in outstanding credit to households, both expressed as ratios to GDP. Conversely, the feedback effects from financial deepening to the size of the informal sector are weak and statistically not significant. Through a difference-in-difference approach exploiting the regularisation program for immigrant workers launched in 2002 we also identify a negative effect of the irregular labour on banks' entry decisions in the local credit markets, now defined in terms of provinces.

Keywords: irregular employment; bank lending; school drop-out; entry; branching; regularisation programme (search for similar items in EconPapers)
JEL-codes: G21 O17 R23 (search for similar items in EconPapers)
Date: 2007-04
New Economics Papers: this item is included in nep-ban
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Working Paper: Does the underground economy hold back financial deepening? Evidence from the Italian credit market (2007) Downloads
Working Paper: Does the underground economy hold back financial deepening? Evidence from the Italian credit market (2007) Downloads
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