Abstract
What are the factors that lead a registered firm to evade taxes? What are the conditions in the formal and informal sectors of the economy that influence this relationship? We tackle these questions by focusing on registered firms operating in countries of various institutional backgrounds and by comparing the incentives and constraints of staying within the formal sector against the competitive pressures originating from the informal sector. We hypothesize that it is the combination of these effects that largely influences registered firms’ tax evasion decisions. Our findings highlight the dark side of competition, particularly when the competitive forces originate from perceivably unfair sources (i.e. informal economy), and how the consequences of this phenomenon are moderated by the institutional conditions of the environment.
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