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    In the Shadows? Informal Enterprise in Non-Democracies
    20 Mar 2019Working Paper Summaries

    In the Shadows? Informal Enterprise in Non-Democracies

    by Kristin Fabbe, Allison Spencer Hartnett, and Steve L. Monroe
    With the informal economy representing a third of the GDP in an average Middle East and North African country, why do chronically indebted regimes tolerate such a large and untaxed shadow economy? Among this study’s findings, higher rates of public sector employment correlate with greater permissibility of firm informality.
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    Author Abstract

    Why do regimes allow some low-income business owners to avoid taxes by operating informally? Electoral incentives are central to prevailing explanations of governments’ forbearance of informal enterprise. Yet many unelected regimes host large informal economies. This article examines forbearance in non-democracies. We argue that unelected regimes forbear their supporters’ informal businesses. We test this argument in Jordan. Using survey data of over 3,800 micro and small enterprises (MSEs), we find that informal businesses are more likely to operate in districts with higher rates of public sector employment, the crown jewel of the Jordanian regime’s patronage. Interviews with over 60 of the surveyed firm owners across four strategically paired districts illustrate that business owners covet forbearance and that kinship ties to public sector employees limit forbearance to regime supporters. Communities that attract higher rates of public sector employment forfeit higher levels of fiscal revenue by permitting informality. This complementarity between public sector employment and forbearance amplifies inequalities between regime supporters and opponents in non-democracies.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: February 2019
    • HBS Working Paper Number: HBS Working Paper #19-083
    • Faculty Unit(s): Business, Government and International Economy
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    Kristin E. Fabbe
    Kristin E. Fabbe
    Jakurski Family Associate Professor of Business Administration
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