TY - JOUR
T1 - Is the devil in the shadow? The effect of institutional quality on income
AU - Jahan, Israt
AU - Bologna Pavlik, Jamie
AU - Williams, Ryan Blake
N1 - Publisher Copyright:
© 2020 John Wiley & Sons Ltd
PY - 2020/11
Y1 - 2020/11
N2 - The positive relationship between institutional quality and “official” income is well documented. It is unclear, however, whether this relationship holds once the “unofficial” economy is accounted for. An improvement in institutional quality tends to shift production out of the shadow and into the official sector, resulting in an increase in official income. However, this shift comes at the expense of the informal economy, potentially negating the perceived gains in output. This paper uses data from 5,506 Brazilian municipalities to explore the effects of institutional quality on total income per person. We additionally estimate the effect of institutions on informal sector size. Our most robust finding suggests that higher-quality institutions using our broadest measure are significantly related to development. While good institutions do decrease the size of the informal sector, the consequential switch to formality raises overall productivity.
AB - The positive relationship between institutional quality and “official” income is well documented. It is unclear, however, whether this relationship holds once the “unofficial” economy is accounted for. An improvement in institutional quality tends to shift production out of the shadow and into the official sector, resulting in an increase in official income. However, this shift comes at the expense of the informal economy, potentially negating the perceived gains in output. This paper uses data from 5,506 Brazilian municipalities to explore the effects of institutional quality on total income per person. We additionally estimate the effect of institutions on informal sector size. Our most robust finding suggests that higher-quality institutions using our broadest measure are significantly related to development. While good institutions do decrease the size of the informal sector, the consequential switch to formality raises overall productivity.
KW - development
KW - informal sector
KW - institutions
KW - shadow economy
UR - http://www.scopus.com/inward/record.url?scp=85090086993&partnerID=8YFLogxK
U2 - 10.1111/rode.12691
DO - 10.1111/rode.12691
M3 - Article
AN - SCOPUS:85090086993
VL - 24
SP - 1463
EP - 1483
JO - Review of Development Economics
JF - Review of Development Economics
SN - 1363-6669
IS - 4
ER -