Informal Economy and Institutional Quality

Abstract

This paper examines the relationship between different dimensions of institutional quality and informal sector size using a large dataset covering 140 countries. It included the most recent data (from the year 2019) of informal sector size (measured as a percent of GDP) and several different institutional quality variables, which include corruption control, law and order, bureaucracy quality, military in politics, democratic accountability, ethnic tensions, and religious tensions. A simple correlation analysis indicates that the correlation of informality with law and order, corruption control, bureaucracy quality, and military in politics is most significant. These results help to identify which dimensions of institutional quality are more relevant to account for the variation in the informal sector size.