Commodity‐Driven Fiscal Windfalls, Investment Freedom, Labour Freedom and the Informal Sector in Nigerian States: A Shift‐Share Evidence

This article examines whether commodity‐driven fiscal windfalls improve subnational economic freedom and whether higher economic freedom reduces informal employment. A state‐level index of investment and labour freedom is linked to five waves of the General Household Survey‐Panel (2010–2023). Identification relies on a shift‐share instrument that interacts 1990 commodity specialisation with global price shocks. The study finds that a one log‐point commodity‐driven revenue shock raises the composite economic freedom index by 18.4 points, with symmetric effects on investment freedom and labour freedom. A 10‐point improvement in the composite index corresponds to a 6.83 percentage‐point reduction in informal employment. Formalisation operates through improvements in administrative capacity rather than through public sector hiring or patronage. The effect is strongest in high‐informality states and among medium‐sized firms, consistent with the theoretical prediction that firms near the compliance‐cost threshold are most responsive to regulatory improvements. These findings contradict the resource‐curse hypothesis and demonstrate that competitive federalism can effectively align fiscal windfalls with institutional development. The principal policy implication is that federal transfer architecture should ring‐fence a portion of windfall revenues toward regulatory capacity building, positioning intergovernmental fiscal design as the mechanism for converting commodity booms into sustained institutional improvement.