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This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. The relevance of this credit channel is gauged using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil. It is found that formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. Also found is that, decomposing shifts in formalization rates into those within each firm size category and those between firm sizes, financial deepening significantly explains the former but not so much the latter. Some key policy implications are derived.
This paper explores whether the extent of informality in a sector affects a firm’s investment decision directly or indirectly through a credit availability channel. The dataset used in the estimation of the econometric models consists of an unbalanced panel of Uruguayan firms for the period 1997-2008. The results suggest that financial restrictions affect investment decisions in Uruguay, as an inc ... (View publication)
This paper explores the links between labor formality, access to credit and firm performance in Colombia using Annual Manufacturing Survey data for the period 2000-2009. A significant though small relationship is found between access to credit and informality. The results suggest that a 10 percent increase in the ratio of credit to sectoral output increases labor formality between 0.76 and 1.14 pe ... (View publication)
This paper examines the link between financial deepening and formalization in Peru. Using data from the National Household Survey, Bloomberg and the Central Bank of Peru Central Bank, the Cata~o, Page´s, and Rosales (2009) model is implemented at activity level (2-digits ISIC), and the Rajan and Zingales (1998) approach of sectors’ dependence on external funds is followed. The sample is divided in ... (View publication)
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