Explaining the informal economy in Western Europe: beyond a rational economic actor perspective

Abstract

PurposeThe dominant theorisation of the informal economy views participants as rational economic actors operating in the informal economy when the expected benefits exceed the perceived costs of being caught and punished. Recently, an alternative theory has emerged which views participants as social actors operating in the informal economy due to their lack of vertical trust (in governments) and horizontal trust (in others). The aim of this paper is to evaluate these competing theorisations.Design/methodology/approachTo do so, data are reported from special Eurobarometer surveys conducted in 2007, 2013 and 2019 in eight West European countries (Austria, Belgium, France, Germany, Ireland, Luxembourg, the Netherlands and the United Kingdom).FindingsUsing probit regression analysis, the finding is that increasing the expected likelihood of being caught and level of punishment had a weak significant impact on the likelihood of participating in the informal economy in 2007, and there was no significant impact in 2013 and 2019. However, greater vertical and horizontal trust is significantly associated with a lower level of participation in the informal economy in all three time periods.Practical implicationsThe outcome is a call for a policy to shift away from increasing the expected level of punishment and likelihood of being caught, and towards improving vertical and horizontal trust. How this can be achieved is explored.Originality/valueEvidence is provided in a Western European context to support a shift away from a rational economic actor to a social actor approach when explaining and tackling the informal economy.

(Shared) ethnicity in ethnographic research on clandestine and informal practices in the migrant and ethnic minority economy

“…Various participants would admit outright that they paid bribes for working permits, employed their workers informally without paying taxes and/or were evading value added taxes. Informal behaviours were thus more or less normalised, which is in line with the literature that shows that the informal economy in some contexts is rather the norm and not the exception (Williams & Oz-Yalaman, 2021).…”

Retailer-reseller embeddedness and price-setting in the informal economy

“…This paper advances the literature on informal economies (Bruton Ireland and Ketchen, 2012;ILO, 2018;Galdino et al, 2018;Godfrey, 2011;McGahan, 2012;Schneider, 2012;Webb et al, 2014;Williams and Oz-Yalaman, 2020). As far as the author knows, this is the first study to investigate pricing methods within the informal economy.…”

“…Informal economies are prevalent and highly researched (Bruton et al, 2012;ILO, 2015;Galdino et al, 2018;Godfrey, 2011;McGahan, 2012;Schneider, 2012;Webb et al, 2014;Williams and Oz-Yalaman, 2020). These are economies comprising groups governed by socially shared and unwritten rules and who function outside of officially regulated channels (Helmke and Levitsky, 2004).…”

Measuring the Immeasurable: The Evolution of the Size of Informal Economy in the Agricultural Sector in the EU-15 Up to 2019

“…The distrust to public institutions also serves as a motivational factor for the informal economy (Webb et al, 2013). It is even revealed that higher chances to be caught or harsher punishments do not impact the level of the informal economy, whereas the level of trust in the government does (Williams & Oz-Yalaman, 2020). Some social informal groups with its own rules and informal economic activities are will be used to substitute weak public social protection mechanisms (Stavropoulou, Holmes & Jones, 2017).…”