Does manager education play a role in the productivity of informal firms in developing economies? Evidence from firm‐level surveys

Abstract

AbstractThe informal sector is dominant in developing economies, and the vast majority of the poor rely on it. There is much to learn about informal firms—the “businesses of the poor”—as little is known about the drivers of their performance. The present paper attempts to fill this gap in the literature by analyzing how labor productivity of informal firms in developing countries depends on the level of education of the manager or the main decision‐maker of the firm. Using survey data for 3,854 informal or unregistered firms in 18 countries in Africa, Asia, and Latin America, we find that labor productivity is 28% to 33% higher when the manager has secondary or higher education versus only primary education or no education. The finding is robust to various robustness checks including parametric and semi‐parametric specifications and confirmed using instrumental variables estimation.