Informality, Inequality, and ICT in Transition Economies

:In this paper, we examine the role of the quality of institutional infrastructure and information and communication technology (ICT) in the relationship between the size of the informal sector (IS) and income inequality. Following our results, the sign of the relationship between IS and income inequality depends on the quality of institutions. When institutions are weak, agents invest less human capital and ICT in the formal sector (FS), thereby reducing income inequality. Utilizing panel data for sixteen transition countries we show that the relationship between the size of the IS and the level of income inequality is ambiguous. Our findings highlight the problem of measuring the relative size of the IS which is a hidden entity. We control for robustness of our findings using alternative proxies of ICT, human capital, and institutional quality and some interaction terms among these variables.