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Financial Dependence, Formal Credit and Informal Jobs - New Evidence from Brazilian Household Data

Luis Catão (), Carmen Pages and Maria Fernanda Rosales

No 4642, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. The relevance of this credit channel is gauged using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil. It is found that formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. Also found is that, decomposing shifts in formalization rates into those within each firm size category and those between firm sizes, financial deepening significantly explains the former but not so much the latter. Some key policy implications are derived.

Keywords: Credit Markets; Financial Dependence; Informality; Brazil (search for similar items in EconPapers)
JEL-codes: E26 G21 O4 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lam and nep-mac
Date: 2009-12
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Related works:
Working Paper: Financial Dependence, Formal Credit and Informal Jobs: New Evidence from Brazilian Household Data (2009) Downloads
Working Paper: Financial Dependence, Formal Credit, and Informal Jobs: New Evidence from Brazilian Household Data (2009) Downloads
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