Can Innovation Reduce the Size of the Informal Economy?

This paper contributes to the literature on the determinants of informality by examining the effect of innovation production on the size of the informal economy, using a sample of 131 countries over the period 2009-2018. Econometric estimations reveal that innovation reduces the size of the informal economy, underscoring the importance of public innovation policies in addressing informality, with potential benefits for tax revenue mobilization. This result remains robust across various controls, alternative estimation techniques, restricted samples, and different measures of both informality and innovation. Economic development, domestic credit mobilization, and e-government are highlighted as key channels through which innovation influences the informal economy.