The paper by Rafael La Porta and Andrei Shleifer examines the role of informal firms in economic development in developing countries. Informal firms, which are not registered with the government, account for about half of all economic activity in these countries. The authors consider three main views on the role of informal firms: the romantic view, the parasite view, and the dual view. The romantic view suggests that informal firms are highly productive and would drive economic growth if not hindered by government regulations. The parasite view argues that informal firms compete unfairly with formal firms by avoiding taxes and regulations, undermining economic progress. The dual view posits that informal firms are inefficient and do not pose a threat to formal firms, but also do not contribute significantly to economic growth. Using data from World Bank firm-level surveys, the authors find that informal firms are small and unproductive, even compared to small formal firms. Formal firms, in contrast, are run by better-educated managers, use more capital, have different customers, and access more external finance. Formal firms rarely operate informally, indicating that the two groups are distinct. The evidence supports the dual view, suggesting that economic development is driven by the creation of highly productive formal firms, while informal firms provide livelihoods for millions of people but eventually disappear as the economy develops. The paper also discusses the determinants of the size of the informal economy and the obstacles to doing business, finding that GDP per capita is the most robust predictor of the size of the informal economy.The paper by Rafael La Porta and Andrei Shleifer examines the role of informal firms in economic development in developing countries. Informal firms, which are not registered with the government, account for about half of all economic activity in these countries. The authors consider three main views on the role of informal firms: the romantic view, the parasite view, and the dual view. The romantic view suggests that informal firms are highly productive and would drive economic growth if not hindered by government regulations. The parasite view argues that informal firms compete unfairly with formal firms by avoiding taxes and regulations, undermining economic progress. The dual view posits that informal firms are inefficient and do not pose a threat to formal firms, but also do not contribute significantly to economic growth. Using data from World Bank firm-level surveys, the authors find that informal firms are small and unproductive, even compared to small formal firms. Formal firms, in contrast, are run by better-educated managers, use more capital, have different customers, and access more external finance. Formal firms rarely operate informally, indicating that the two groups are distinct. The evidence supports the dual view, suggesting that economic development is driven by the creation of highly productive formal firms, while informal firms provide livelihoods for millions of people but eventually disappear as the economy develops. The paper also discusses the determinants of the size of the informal economy and the obstacles to doing business, finding that GDP per capita is the most robust predictor of the size of the informal economy.