Economic Informality: Causes, Costs, and Policies--a Literature Survey (World Bank Working Papers)

In this survey we assemble recent theoretical and empirical advances in the literature on economic informality, analyzing the causes and costs of informality in developed and developing economies. In accordance with recent evidence, we discuss the nature and the roots of informal economic activity across countries distinguishing between informality as the result of ??exclusion?? and ??exit.?? We then provide an extensive review of recent international experience with policies aimed at reducing informality, in particular policies that: (i) facilitate the formalization process, (ii) create a framework for the transition from informality to formality, (iii) lend support to newly created firms, (iv) reduce or eliminate inconsistencies across regulation and government agencies, (v) increase information flows, and (vi) increase enforcement. In this survey the author assemble recent theoretical and empirical advances in the literature on economic informality, analyzing the causes and costs of informality in developed and developing economies. In accordance with recent evidence, the author discusses the nature and the roots of informal economic activity across countries distinguishing between informality as the result of 'exclusion' and 'exit.' The author then provides an extensive review of recent international experience with policies aimed at reducing informality, in particular policies that facilitate the formalization process, create a framework for the transition from informality to formality, lend support to newly created firms, reduce or eliminate inconsistencies across regulation and government agencies, increase information flows, and increase enforcement

This survey assembles recent theoretical and empirical advances in the literature on economic informality and analyzes the causes and costs of informality in developed and developing economies. Using recent evidence, the survey discusses the nature and roots of informal economic activity across countries, distinguishing between informality as the result of "exclusion" and "exit." The survey provides an extensive review of recent international experience with policies aimed at reducing informality, in particular, policies that facilitate the formalization process, create a framework for the transition from informality to formality, lend support to newly created firms, reduce or eliminate inconsistencies across regulation and government agencies, increase information flows, and increase enforcement.

1. Introduction. -- 2. What Is Informal Economic Activity? -- Informal Activity In Developing And Developed Economies -- 3. Causes And Costs Of Informal Activities -- Causes: Cross-country Vs. Microdata Studies -- Costs Of Informality Of The Firm -- Aggregate Costs -- Costs Of Informal Employment -- Are There Benefits Of Informality? -- 4. Policies To Reduce Informality -- Increasing Tax Compliance -- Encouraging Business Creation And Growth -- Strengthening Enforcement -- Creating A More Inclusive Social Protection System -- Building Trust And Collective Incentives. Ana Maria Oviedo, Mark R. Thomas, Kamer Karakurum-Özdemir. Includes Bibliographical References.