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Can the digital economy development limit the size of the informal economy? A nonlinear analysis based on China's provincial panel data

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  • Lv, Jiamin
  • Li, Shi
  • Zhu, Mengying
  • Huang, Wenli

Abstract

This paper investigates whether and how digital economy (especially digital platforms and digital finance) restrains the informal economic activities in China measured by the MIMIC (multiple indicators multiple causes) model. Using Chinese provincial panel data from 1995 to 2020, we find that the average size of China's provincial informal economy displays a five-stage fluctuation, ranging from 13.63 % to 17.53 %. More importantly, we uncover a robust “inverted U-shaped” nonlinear relationship between the digital platform development and the informal economy, with a turning point of 0.4189. Initially, the development of digital platforms increases informal economic activities by disrupting traditional sectors, causing new types of tax evasion, challenging regulators and raising digital crime. However, beyond a certain threshold, digital platforms can overcome these problems through more job creations and improved regulation. Meanwhile, the digital financial development is proved to have a negative impact on the informal economy because it can offer much more advantages in addressing informality such as making payments transparent, easing credit constraints, raising total income, helping governments reach people and businesses. Our study provides convincing evidence and valuable advice for policymakers when developing digital economy to curb the informal economy.

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  • Lv, Jiamin & Li, Shi & Zhu, Mengying & Huang, Wenli, 2024. "Can the digital economy development limit the size of the informal economy? A nonlinear analysis based on China's provincial panel data," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 896-921.
  • Handle: RePEc:eee:ecanpo:v:83:y:2024:i:c:p:896-921
    DOI: 10.1016/j.eap.2024.07.022
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    More about this item

    Keywords

    Informal economy; Digital economy; Digital finance; MIMIC; Nonlinear analysis;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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