Governance, Corruption, and the Informal Economy

This paper uses data from 23 Sub-Saharan countries to analyze the relationship between governance, corruption, and the size of the informal economy. The results show that corruption, the quality of governance, the quality of institutional settings, and the unemployment rates are major determinants of the size of the informal economy. More specifically, it is found that a high level of corruption and poor institutional settings favor an increase of the informal economy. The unemployment rate is negatively related to the size of the informal economy, and greater fiscal freedom and business freedom are associated with a larger informal economy, while monetary freedom reduces the size of the informal sector.