An empirical study of firm characteristics, degree of informality, and productivity heterogeneity in the Indian informal sector

Abstract

ABSTRACT Traditionally, informal firms are assumed to be a homogeneous mix of firms structurally different from formal firms. However, the emerging literature recognizes the high level of heterogeneity among the informal firms and hypothesizes that these informal firms vary in terms of their degree of informality. The goal of this study is to understand the characteristics of the firms operating at different levels of informality and to investigate its impact on firm performance, using a nationally representative dataset from India. We find that firms that are female-owned, rurally located, unbanked, have small asset sizes, and belong to traditional sectors are more likely to operate at higher informal levels. We also find that less informal firms are more productive. We also estimate the average treatment effect using propensity score matching as a robustness check.