Journal Article

What induces firms to subcontract to the informal sector? Evidence from a developing country


  • Goel
  • R.
  • Rehman
  • F.
Publication Date

Adding specific firm-level insights into the factors driving firms to subcontract operations to the informal sector, this article uses data from garment exporters in Pakistan. Nesting the analysis in the larger literature on the drivers of the shadow economy, we find that sole proprietorship ownership structure was more likely to subcontract underground, as were older entrepreneurs. On the other hand, older firms were less likely to subcontract underground. The effects of the entrepreneur’s education, firm size, input costs and overall economic prosperity, economic freedom and government stability were largely insignificant.

Kiel Institute Expert


JEL Classification
L24, L67, H26, O53

Key Words

  • firm age
  • firm size
  • informal economy
  • sole proprietorship
  • subcontracting