Empirical essays on the informal economy

Abstract

In this masters thesis, I empirically study the informal sector in two separate essays, both of which have implications for policy making and make original contributions to the understanding of informality around the world. In the first essay, I investigate the relationship between energy consumption and the size of the informal economy. Relying on panel data regression models, my estimation results show that at the aggregate level, energy intensity is inversely related to the size of the informal sector, providing actual empirical evidence on the presence of high labor and low capital intensity in the informal economy. Furthermore, I also find evidence for the presence of non-linearity and asymmetry in this relationship. In the second essay, I investigate the relationship between the informal sector employment, and micro-level socio-demographic characteristics, political attitudes and individual norms. Using self-reported data, I show that socio-demographic characteristics are strong predictors of the informal sector employment. Moreover, individuals preferences for an economically strong state, as much as their confidence in political institutions are significantly and positively correlated with the informal sector employment, whereas variables associated with confidence in market institutions are negatively correlated with the informal sector employment. I also show that individuals who participate in political processes have a lower probability of working in the informal sector. Finally, I show that individual norms, such as religiosity and tax morale are negatively correlated with the informal sector employment, as well.