Remittances and informal economy: does institutional quality matter?

Purpose This study aims to analyze the relationship between remittances, institutional quality and the informal economy. In addition, this paper investigates how institutional quality moderates the effects of remittances on the informal economy. Design/methodology/approach By utilizing a data set spanning from 2000 to 2020 of 84 countries, this study employs various techniques to explore this relationship in both the long run and short run. The analysis also considers the marginal effects of remittances on the informal economy at different levels of institutional quality. Findings The results indicate that an increase in remittances and institutional quality reduces the size of the informal economy. Interestingly, the effects of remittances on the informal economy will be enhanced with a higher institutional quality. Meanwhile, unemployment and tax burden increase the size of informality. The results are robust to various specifications, and their broader implications are discussed. Practical implications Governments should attract and enhance remittance inflows and institutional quality to reduce informality. Besides, policymakers should enforce supportive policies to reduce unemployment and tax burden to control the size of the informal economy. Originality/value To the best of the author's knowledge, this study is the first empirical study conducted to investigate the moderating effect of institutional quality in the relationship between remittance and the informal economy.