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Environmental Regulation, Pollution and the Informal Economy

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  • Ceyhun Elgin
  • Ummad Mazhar
Abstract
The regulation of environmental pollution is challenging. Particularly, the presence of institutional weaknesses like informal economy may not allow effective regulation. In this context, this paper addresses three related questions: (a) How stringent environmental regulation affects pollution? (b) What is the link between stringency of environmental regulation and the size of the informal economy? (c) How informal economy affects formal sector pollution? We use a data set of more than 100 countries from 2007 to 2010, a multivariate framework that controls for the influence of important factors and an index of perceived stringency of environmental regulation. The main findings of the paper, in line with theoretical reasoning, are that (i) stringent environmental regulation reduces pollution and (ii) stringent environmental regulation increases the size of the informal economy. This evidence suggests that informal economy helps avoid environmental regulation by being outside the regulatory sphere. An additional support to this finding is provided by the robust negative correlation between the size of the informal economy and the formal sector pollution. Our findings are based on interactive and non-linear effects that are tested and verified. In this regard, the paper raises new issues about possible mechanisms to reduce pollution in the presence of the informal economy.
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Suggested Citation

  • Ceyhun Elgin & Ummad Mazhar, 2012. "Environmental Regulation, Pollution and the Informal Economy," Working Papers 2012/07, Bogazici University, Department of Economics.
    • Handle: RePEc:bou:wpaper:2012/07
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    3. James Temitope Dada & Folorunsho Monsur Ajide & Adams Adeiza, 2022. "Shadow Economy and Environmental Pollution in West African Countries: The Role of Institutions," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(3), pages 366-389, September.
    4. Shi Wang & Yizhou Yuan & Hua Wang, 2019. "Corruption, Hidden Economy and Environmental Pollution: A Spatial Econometric Analysis Based on China’s Provincial Panel Data," IJERPH, MDPI, vol. 16(16), pages 1-23, August.
    5. Jun Ma & Ke Huang, 2023. "Examining the Factors Influencing Agricultural Surface Source Pollution in the Yangtze River Economic Zone from the Perspectives of Government, Enterprise, and Agriculture," Sustainability, MDPI, vol. 15(20), pages 1-16, October.
    6. Jiachao Peng & Shuke Fu & Da Gao & Jiali Tian, 2023. "Greening China’s Growth: Assessing the Synergistic Impact of Financial Development and Technological Innovation on Environmental Pollution Reduction—A Spatial STIRPAT Analysis," IJERPH, MDPI, vol. 20(6), pages 1-19, March.
    7. Pang, Jingru & Li, Nan & Mu, Hailin & Jin, Xin & Zhang, Ming, 2022. "Asymmetric effects of urbanization on shadow economy both in short-run and long-run:New evidence from dynamic panel threshold model," Technological Forecasting and Social Change, Elsevier, vol. 177(C).
    8. Hilaire Nkengfack & Hervé Kaffo Fotio & Armand Totouom, 2021. "How Does the Shadow Economy Affect Environmental Quality in Sub-Saharan Africa? Evidence from Heterogeneous Panel Estimations," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 12(4), pages 1635-1651, December.
    9. Alvarado, Rafael & Tillaguango, Brayan & Murshed, Muntasir & Ochoa-Moreno, Santiago & Rehman, Abdul & Işık, Cem & Alvarado-Espejo, Johana, 2022. "Impact of the informal economy on the ecological footprint: The role of urban concentration and globalization," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 750-767.
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    More about this item

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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