Inequality and informality

Alberto Chong; Mark Gradstein

doi:10.1016/j.jpubeco.2006.08.001

Inequality and informality

Alberto Chong, Mark Gradstein

Department of Economics

Research output: Contribution to journal › Article › peer-review

107 Scopus citations

Abstract

This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through regulations lose much of its robustness in the presence of the above factors.

Original language	English
Pages (from-to)	159-179
Number of pages	21
Journal	Journal of Public Economics
Volume	91
Issue number	1-2
DOIs	https://doi.org/10.1016/j.jpubeco.2006.08.001
State	Published - 1 Feb 2007

Keywords

Inequality
Informal sector
Institutional quality
Shadow economy

ASJC Scopus subject areas

Finance
Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jpubeco.2006.08.001

Cite this

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title = "Inequality and informality",

abstract = "This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through regulations lose much of its robustness in the presence of the above factors.",

keywords = "Inequality, Informal sector, Institutional quality, Shadow economy",

author = "Alberto Chong and Mark Gradstein",

note = "Funding Information: Our thanks to Cesar Calderon, Norman Loayza, and Ugo Panizza for useful comments on a previous draft and to Cecilia Calderon, Gianmarco Leon, and Rudy Loo-Kung for their excellent research assistance. We particularly acknowledge with much gratitude very specific and constructive comments of two anonymous referees. Mark Gradstein acknowledges the financial support of the Ben Gurion University and Sapir College Foundation for Research in Economics and Social Issues. The findings and interpretations are those of the authors and do not necessarily represent the views of the Inter-American Development Bank or their corresponding executive directors. The standard disclaimer applies. ",

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AU - Gradstein, Mark

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N2 - This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through regulations lose much of its robustness in the presence of the above factors.

AB - This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through regulations lose much of its robustness in the presence of the above factors.

KW - Inequality

KW - Informal sector

KW - Institutional quality

KW - Shadow economy

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ER -

Inequality and informality

Abstract

Keywords

ASJC Scopus subject areas

UN SDGs

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