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Discussion Paper

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Firms make investments in technology to increase productivity. But in emerging markets, where a culture of informality is widespread, information technology (IT) investments leading to greater transparency can impose a cost through higher taxes and need for regulatory compliance. This tendency of firms to avoid productivity-enhancing technologies and remain small to avoid transparency has been dubbed the “Peter Pan Syndrome.” We examine whether firms make the tradeoff between productivity and transparency by examining IT adoption in the Indian retail sector. We find that computer technology adoption is lower when firms have motivations to avoid transparency. Specifically, technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing. So firms have a higher productivity gain threshold to adopt computers in corrupt business environments with patchy and variable enforcement of the tax laws. Not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption. Thus in addition to their direct effects on the economy, enforcement, auditing and corruption can have indirect effects through their negative impact on adoption of productivity enhancing technologies that also increase operational transparency.

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