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Institutions, Informal Economy, and Economic Development

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  • Ceyhun Elgin
  • Oguz Oztunali

Abstract

Using cross-national panel data, we examine the evolution of the informal economy through the course of economic development. Borrowing from previously published informal economy estimates for 141 countries over the period 1984-2009 and using panel data estimation techniques, we investigate the relationship between informal economy and the level of economic development, proxied by gross domestic product (GDP) per capita. Our findings suggest that institutional quality strongly interacts with this relationship. Specifically, we find that a higher GDP per capita is associated with a larger informal sector size in countries where the institutional quality is low. The opposite is true in countries with good institutions. These results are also in line with a two-sector dynamic general equilibrium model.

Suggested Citation

  • Ceyhun Elgin & Oguz Oztunali, 2014. "Institutions, Informal Economy, and Economic Development," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(4), pages 145-162.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:4:p:145-162
    DOI: 10.2753/REE1540-496X500409
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