ABSTRACT
This chapter highlights the institutional reasons for understanding high compliance costs by reviewing a series of studies on the economic and social conditions of the urban informal sector in China. It argues that the welfare losses under these institutional constraints may not be as large as expected due to the existence of the feedback effects. The chapter focuses on the implications of the informality for individual workers rather than government revenue. It also argues that besides urbanization, there are several institutional reasons to explain the large and increasing informal sector. The chapter shows that the intergovernmental fiscal system, the performance evaluation system for officials, and the hukou system are the major institutional reasons for high regulation compliance costs. Policy-makers may want to address the institutional reasons for high regulatory compliance costs to achieve their policy targets for economic and social development.
