Correlates of Informality: Evidence from The World Bank Enterprise Surveys Across 16 Economies

Abstract

The paper explores the correlates of the degree of informality among informal firms, based on partial correlations between firm characteristics, perceptions of the business environment, and a multidimensional index of informality. The study uses micro-level data from the World Bank Informal Sector Enterprise Survey(ISES), which includes 54,266 unregistered firms from 16 developing countries. The informality index measures four operational aspects of informality including record-keeping practices, integration with the formal financial sector, and tax evasion. The findings suggest that regulatory costs (registration, taxation, and inspections) and perceived benefits of formalization (access to finance and customers) are not significantly associated with informality once firm and owner characteristics are controlled for. By contrast, informality is more strongly associated with firm-level structural characteristics: larger and more productive firms, firms with permanent premises, and firms with more educated owners are less informal. Informal payments (corruption) are consistently associated with informality, which may indicate that firms use informal mechanisms to complement formal constraints. The interaction results offer limited evidence that regulatory costs substantially affect the impact of perceived benefits. The decomposition of the informality index also suggests that different dimensions of informality respond differently to specific factors, especially in relation to taxation related behavior.