Inequality and informality

Alberto Chong, Mark Gradstein

Research output: Contribution to journalArticlepeer-review

73 Scopus citations


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 languageEnglish
Pages (from-to)159-179
Number of pages21
JournalJournal of Public Economics
Issue number1-2
StatePublished - 1 Feb 2007


  • Inequality
  • Informal sector
  • Institutional quality
  • Shadow economy


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