likelihood of corruption is higher when regulatory processes are complex and/or unclear. Furthermore, in such cases, firms are pushed out of the formal sector and start operating in the informal economy. Djankov et al. (2002) analyze firm entry regulation in 85 countries and find that in the economies with more heavily regulated business entry the level of corruption and the size of unofficial economy are considerably higher, while the quality of public and private goods is lower. The authors also conclude that opaque regulation of entry is beneficial for bureaucrats and politicians, as it can serve them as a rent extraction mechanism. Conversely, relatively light regulation of entry is commonly observed in the economies with more democratic governments.

Focusing on a similar subject, Ulyssea (2010) argues that high costs of entry are linked with higher level of informality, worse labor market performance and lower welfare of an economy. Hence, reduction in the cost of entry to the formal sector is a key element for shrinking the informal economy. Yet, firms operating informally have different reasons and incentives for doing so with regards to regulatory reforms. For instance, while some are prompted to resort to informality due to unwieldly regulations, others remain informal for a limited time - until owners find wage jobs. Moreover, Ulyssea (2018) employs data on Brazilian firms to investigate the response of informal firms to formalization policies as well as the effects of such policies on economic performance and development. The author highlights the importance of differentiation between the two margins of informality – non-payment of registration fees and payment of informal wages to workers – for policy formulation and analysis. This research demonstrates a negative relationship between enforcement and both informality and welfare creation. Entry costs reduction in the formal sector has weaker effect on the decrease of informality, yet strong positive effect on welfare gains, GDP growth and wages. Similarly, Maican and Orth (2018) analyze Swedish retail food stores data and establish that, by enhancing competition, lower entry costs increase welfare in differentiated product markets.

According to Bruhn (2013), different types of business owners in the informal economy react to reforms in different ways. Analyzing the effects of a business registration reform in Mexico, the author explains why this reform did not impact all the informal business owners in the same way. The results demonstrate that the owners of informal businesses were more likely to register them if prior to the reform they possessed similar personal characteristics to those of formal business owners. Such characteristics included gender, age, marital status, education as well as being a head of a household and/or a migrant. In turn, owners of informal businesses with traits similar to those of wage workers, were more likely to become wage workers rather than formalize their businesses even when regulations became more conducive.

At the same time, Demenet (2016) finds that by moving from informal economy to formal registration, firms get greater access to new equipment and can increase their scale of operations, resulting in higher competitiveness and productivity. Curtis (2016) takes the example of China to examine the impact of business reforms on the country’s total factor productivity growth. Building a model that captures both the private and state sectors, the author finds that entrepreneurship-friendly business reforms lead to expansion of a private sector and exit of least productive state firms from the market, hence increasing total factor productivity gains. Furthermore, Djankov et al. (2018) analyze panel data for 189 economies from 2005 to 2013 to suggest that effective business regulations can contribute to poverty reduction; mostly due to stimulation of job creation and promotion of entrepreneurship. The 7