The Patrimonial State and the Informal Economy

This paper examines the relationship between the neopatrimonial state and the informal economy in a systematic cross‐national panel framework. Neopatrimonialism refers to the coexistence of formally modern state institutions with personalistic rule through patronage networks, clientelism, and selective enforcement, and it creates structural incentives for firms and workers to operate outside formal regulatory frameworks. Despite a rich theoretical literature linking the patrimonial state to informality, no prior study has tested this relationship using a dedicated, multidimensional neopatrimonialism measure. Using panel data for up to 151 countries from 1990–2020, the V‐Dem Neopatrimonial Rule Index, and a correlated random‐effects specification that separates within‐country from between‐country variation, we find that neopatrimonialism is positively associated with larger shadow economies in the between‐country dimension. The relationship is structural rather than short‐run and survives controls for democratic accountability, suggesting that neopatrimonialism is not reducible to regime type or electoral accountability. However, broader institutional‐quality controls, especially corruption and bureaucratic/legal quality, substantially attenuate the coefficient, indicating that these institutional features are channels through which neopatrimonial political orders shape informality.