Firms Informality: A Model and Empirical Evidence for 2 MENA Countries

This paper tests the implications of a simple equilibrium model that describes informal economy in Lebanon. The results suggest that informal firms are less productive, managed by less educated entrepreneurs, are smaller and are facing less inspection from the tax department and the social security audits, which we verify in the data. The paper also investigates how the quality of legal enforcement, captured by the likelihood of detection in the informal sector, affects firm's decision to be formal or informal.