This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which the informal sector`s size is negatively related to institutional quality and positively related to income inequality. These predictions are then...

Poorer countries have a much smaller public sector and correspondingly a smaller tax burden than richer countries, yet, their economic performance has not been necessarily better. Using a simple model, this paper suggests that the growth and welfare effects of taxation are mediated through...