Informality and Access to Finance: Evidence from India
CentER Discussion Paper Series No. 2014-052
58 Pages Posted: 4 Sep 2014 Last revised: 1 Nov 2023
Date Written: September 4, 2014
Abstract
This paper gauges the relationship between financial depth and outreach and informality using firm- and household-survey data from India and distinguishing between two different margins: formal vs. informal entrepreneurship and informal entrepreneurship vs. salaried work. We find evidence for three channels through which financial development can reduce informality: reducing the entry barrier to the formal sector, increasing productivity of formal firms, and reallocating informal business owners to salaried jobs in formal firms. Financial outreach, as gauged by branch penetration, has a stronger effect on reducing the incidence of informality by reducing barriers to the formal economy, especially for smaller firms. Financial depth, as measured by credit to SDP, increases the productivity of formal sector firms and facilitates a transition of informal business owners into salaried jobs in the formal sector.
Keywords: Informality, Financial Development, India
JEL Classification: G21, G28, O15, O16
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