Managing Credit Constraints Under Competitive Pressure From the Informal Sector

ABSTRACT Using a large firm‐level dataset from the World Bank Enterprise Surveys, covering 145 countries between 2006 and 2024 and comprising over 158,900 observations, we examine whether informal competition—defined as competition from informal firms—affects the credit constraints of registered firms worldwide. Estimations, based on the instrumental variable method, indicate that registered firms competing with informal firms are significantly more likely to be credit‐constrained than those that do not. This finding is highly robust. The detrimental effect of informal competition diminishes with greater managerial experience, firm age, productivity, self‐financing capacity and banking accessibility, as well as with stronger structural factors such as real GDP per capita, domestic credit to the private sector, regulatory quality, rule of law and control of corruption. However, the effect of informal competition increases with higher income inequality and firm size. Sales, productivity and informal payments are key transmission channels.