Is informality a barrier to financial development?

C. Elgin, R.B. Uras

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999–2007 we also provide empirical support for the mechanism of our theory.
Original languageEnglish
Pages (from-to)309-331
JournalJournal of the Spanish Economic Association
Volume4
Issue number3
Publication statusPublished - 2013

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Informality
Financial development
Informal sector
Financial repression
Tax evasion
Financial sector
Capacity constraints
Panel data
Informal economy

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title = "Is informality a barrier to financial development?",
abstract = "This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999–2007 we also provide empirical support for the mechanism of our theory.",
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Is informality a barrier to financial development? / Elgin, C.; Uras, R.B.

In: Journal of the Spanish Economic Association, Vol. 4, No. 3, 2013, p. 309-331.

Research output: Contribution to journalArticleScientificpeer-review

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N2 - This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999–2007 we also provide empirical support for the mechanism of our theory.

AB - This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999–2007 we also provide empirical support for the mechanism of our theory.

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