IMF Staff Papers

, Volume 55, Issue 1, pp 50–82

Informality and Regulations: What Drives the Growth of Firms?

  • Era Dabla-Norris
  • Gabriela Inchauste

DOI: 10.1057/palgrave.imfsp.9450030

Cite this article as:
Dabla-Norris, E. & Inchauste, G. IMF Econ Rev (2008) 55: 50. doi:10.1057/palgrave.imfsp.9450030


This paper relies on rich firm-level data on transition economies to examine the role of informality as an important channel through which regulatory and other policy constraints affect firm growth. We find that firms reduce their formal operations with greater tax and regulatory burdens, but increase them with better enforcement quality. In terms of firm growth, we find a differential impact of regulatory burden and enforcement quality on formal and informal firm growth. In particular, we find that growth in formal firms is negatively affected by both tax and financing constraints, whereas these constraints are insignificant for growth in informal firms. Moreover, formal firm growth improves with better enforcement, while informal firm growth is constrained by organized crime, pointing to informal firms' inability to take full advantage of the legal and judicial systems. Finally, we find that an interaction term between a countrywide measure of the rule of law and formality is positive, suggesting that better rule of law improves formal firm growth.

JEL Classifications

L25 O17 O43 P26 P37 

Copyright information

© International Monetary Fund 2008

Authors and Affiliations

  • Era Dabla-Norris
  • Gabriela Inchauste

There are no affiliations available