This randomized trial evaluates how economic freedom affects the informal economy in developing countries, highlighting critical factors like corruption and human capital.
Key Points
This study aims to assess how economic freedom influences the size of the informal economy in developing countries.
Used panel data from 1996 to 2018 across developing countries
Employed Method of Moments Quantile Regression (MMQR) and two-step System GMM
Tested robustness with Dynamic General Equilibrium (DGE) and Multiple Indicators Multiple Causes (MIMIC) measures
Legal system integrity, trade freedom, and regulatory quality were found to significantly drive formalization.
Corruption increases informal activity even with high economic freedom.
Human capital investment enhances participation in the formal sector.