Digital Finance, Tax Aversion, Institutional Trust, and the Informal Economy: Evidence from Enterprises of Quetta City

The study empirically investigates the determinants of the informal economy among 200 enterprises in Quetta, Pakistan. Employing ordinal logistic regression on a spectrum-based measure of informality, the analysis identifies key behavioral and institutional drivers. Results confirm that tax aversion and perceptions of institutional weakness are significant positive predictors of higher informality levels, aligning with behavioral tax compliance and institutional theories. Crucially, the study reveals a significant formalizing effect, finding that the adoption of digital financial services (DFS) is associated with a shift towards greater formality. It highlights the role of DFS not only as a transactional tool but also as a mechanism for economic integration. The findings validate a continuum model of informality and suggest that policies aimed at formalization should concurrently address institutional trust, tax morale, and digital financial inclusion.