When will formality become the norm?

Abstract

An enterprise is not inherently formal or informal with regard to its characteristics (such as size, among other things) or the nature of employment. Informality is a choice in relation to regulation by the State. In order to grow, firms need external funds that they access from financial institutions. This requires them to reveal their assets as collateral and once they access financial institutions, they leave a paper trail that facilitates tax enforcement. This indicates a relationship between financial development and tax buoyancy, which this paper explores. In addition, the impact of judicial efficiency in terms of contract enforcement, collateral regimes, and bankruptcy laws affects the flow of finance and the incentive to be informal.