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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
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Maria Fernanda Rosales: University of Chicago

No 4609, IZA Discussion Papers from Institute for the Study of Labor (IZA)

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; if so, well-functioning credit markets help foster formal employment at the expense of informal jobs. We gauge the relevance of this credit channel using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil – a large emerging market where substantial changes in banking system depth and formalization ratios have taken place and for which consistent data exists. Our results show that formalization rates increase with financial deepening and the more so in sectors where firms are typically more dependent on external finance. We also decompose shifts in aggregate formalization into those within each firm size category and those associated with changes in firm size, and find that financial deepening significantly explains the former but not so much the latter.

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-ban, nep-dev and nep-mac
Date: 2009-12
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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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