State History and the Size of the Informal Economy: Does Control of Corruption Matter?

This study investigates how state history influences the size of the informal sector through control of corruption and its sub-components. The study employs ordinary and two-stage least square estimation techniques with data from 110 countries for the period 1993–2018 to examine this relationship. Our results show that the longer state history reduces the size of the informal economy through strict control of corruption. Moreover, among the four sub-measures of control of corruption studied, the strongest indirect effects occur via the control of executive (68%) and public sector (64%) corruption. Therefore, the fight against the expansion of the informal economy may face obstacles in countries with a short history of statehood, where the fight against corruption has not had sufficient time to develop. Policymakers should keep this in mind when designing their economic policies. Fighting corruption among leaders and officials is a crucial part of implementing policies to combat the growing size of the informal sector.