Indeed, we show that investment in LT projects involves tax evasion, while investment in HT projects requires entrepreneurs to reveal their revenues. The match between LT and HT projects and the formality of the economy accords also with the idea that operations in the underground economy rely on self-financing and more traditional projects. Firms engaged in the formal sector, in contrast, rely more heavily on external finance and implement more technologically advanced projects. In the remainder of this section we study the conditions under which entrepreneurs operate in the formal sector, in the underground economy, or in both. Next, we study how financial development affects these decisions and the level of investment.