Discussion Paper Details

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Title: Inequality and Informality

Author(s): Alberto Chong and Mark Gradstein

Publication Date: March 2006

Keyword(s): inequality, informal sector, institutional quality and shadow economy

Programme Area(s): Public Economics

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 taxes and regulations lose much of their robustness in the presence of the above factors.

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Bibliographic Reference

Chong, A and Gradstein, M. 2006. 'Inequality and Informality'. London, Centre for Economic Policy Research.