"This article examines the relationship between state regulation and the informal economy at the macro-level across a broad set of countries. The analysis shows (a) that countries have different types of regulatory environments—varying by the degree of state regulation of economic activity—and the degree to which the state implements and enforces the existing regulations—and (b) that this variation helps explain why some nations have more informal economic activity than others. The findings also suggest that (c) contrary to what the neoliberal orthodoxy has prescribed over the past few decades, decreasing the degree of state regulation in the economy will not necessarily formalize the economy. The degree of regulation seems to have a significant association with the size of the informal economy only in nations with effective law enforcement. Where this is not the case—as in many developing nations—deregulatory policies are likely to be counter-productive in formalizing the economy. "

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