Roger Koppl and Maria Minniti
José Ernesto Amor—s, Juan Pablo Couyoumdjian, Oscar Cristi and Maria Minniti
The informal sector is usually perceived as a negative feature of an economy since greater informality tends to translate into lower productivity. Nevertheless, informality may be the rational answer to contextual constraints. Thus, given the entrepreneurial nature of the informal sector, we argue that, in an environment with weak institutions, participation in informal activity may be beneficial at both the individual and aggregate levels. Using country-level data we provide evidence of a positive relationship between informal entrepreneurial activity and economic development. Our results suggest that, in countries with weak institutions, informal entrepreneurship is a viable and constructive substitute for the formal sector and is conducive to improvements in living standards.