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Luis Franjo, Nathalie Pouokam, and Francesco Turino

formally. 3 As shown in La Porta and Shleifer (2014b) , a World Bank survey reports that three quarters of the informal entrepreneurs interviewed see better access to credit as one of the potential benefits of becoming formal. 4 Parasite and survival firms are definitions typically adopted in the literature on firm informality. The interested reader is refereed to Ulyssea (2018) , and the references therein, for further details on this point. 5 With the word measured TFP we refer to total factor productivity in the formal sector. 6 More

Luis Franjo, Nathalie Pouokam, and Francesco Turino
In this paper we build a model of occupational choice with informal production and progressive income taxation. We calibrate the model to the Brazilian economy to evaluate the impact of removing financial frictions on informality. We find that financial deepening leads to a drop in the size of the informal sector (from 37 percent to 22 percent of official GDP), to an increase in measured TFP (by 4 percent), to an increase in official GDP (by 27 percent), to a decrease in tax evasion (by 17 percent) and to an increase in fiscal revenues (by 15 percent). When assessing the response of this policy at different levels of financial development, we find a non-linear relationship between the credit-to-GDP ratio on the one hand, and either the size of the informal economy, or GDP per capita on the other hand. We test these features with cross-country data and find evidence in favor of both types of non-linearity. We also investigate changes in the income tax progressitivity as an alternative policy and find it to be more effective in countries with a medium to high level of financial markets development.
Luis Franjo, Nathalie Pouokam, Francesco Turino, and Mr. Norbert Funke

sector, but choose nevertheless to hide their production to avoid taxation ( parasite firms); and (iii) firms that are run by low-skilled agents that are too unproductive to ever become formal entrepreneurs ( survival firms). 4 To address the main question of the paper, we first evaluate the effect of financial deepening in our model economy. We find that completely removing financial constraints triggers a sizeable drop in the size of the informal economy (from 37 to 23 percent of official output), and in tax evasion (a drop of 17 percent), together with an

Luis Franjo, Nathalie Pouokam, and Francesco Turino
Leandro Medina

collapses even after a range of other economic and financial variables are controlled for. 28 Author’s calculations based on International Monetary Fund, International Financial Statistics . 29 For example, Baggs et al. (2008), in a study for Canada, find that real appreciations reduce the probability of firm survival, firm sales, and firm profitability, whereas depreciations have the opposite effect. 30 In this case, an increase means depreciation. 31 EBITDA is a standard measure of performance; the name stands for “earnings before interest

Mr. Antonio David, Samuel Pienknagura, and Mr. Jorge Roldos

. The first are “survivalfirms, a type that is not productive enough to become formal regardless of the costs of formalization. The second type are “opportunistic” informal establishments, a type that takes advantage of low enforcement to save on the costs associated with formalization (and will avoid them if they can regardless of their levels). Finally, there are productive establishments that are informal but would formalize if the costs are low enough. The author finds that roughly half of informal firms in Brazil are “survival” establishments and close to 40

Leandro Medina
This paper studies corporate performance in the aftermath of the global crisis by examining 6,581 manufacturing firms in 48 developed and developing countries in 2010, identifying factors of resilience as well as vulnerability. Based on a cross-sectional analysis, the results show that pre-crisis leverage and short-term debt have had negative effects on the speed of the recovery, while asset tangibility has had positive effects. The negative effect of leverage is non-linear, being particularly strong in firms with high pre-crisis leverage. Furthermore, the effects are different for advanced and emerging market economies. The paper also shows that the macroeconomic framework critically matters for firm growth. In particular, in countries that have allowed the exchange rate to depreciate, firms have had a faster recovery in sectors highly dependent on trade.
Mr. Antonio David, Samuel Pienknagura, and Mr. Jorge Roldos
Labor markets in Latin America and the Caribbean (LAC) are characterized by high levels of informality and relatively rigid regulation. This paper shows that these two features are related and together make the speed of adjustment of employment to shocks slower, especially when regulations are tightly enforced. Evidence suggests that strict labor market regulations also have an adverse effect on medium-term growth. While both regulations on prices (minimum wages) and quantities (employment protection) decrease the speed of adjustment to shocks, they appear to be binding in different phases of the cycle—the former affects mostly the (net) job creation margin and the latter the (net) job destruction margin. The results also highlight possible interactions between labor market regulations and the effectiveness of macro-stabilization tools—including exchange rate depreciation.