Economic Informality: Causes, Costs, and Policies-A Literature Survey

In this survey, we assemble recent theoretical and empirical advances in the literature on economic informality, analyzing the causes and costs of informality in developed and developing economies. In accordance with recent evidence, we discuss the nature and the roots of informal economic activity across countries distinguishing between informality as the result of ‘exclusion’ and ‘exit’. We then provide an extensive review of recent international experience with policies aimed at reducing informality, in particular policies that: facilitate the formalization process, create a framework for the transition from informality to formality, lend support to newly created firms, reduce or eliminate inconsistencies across regulation and government agencies, increase information flows, and increase enforcement.