Evaluating policy approaches for tackling informal entrepreneurship

When tackling the informal economy, an emergent literature has called for the conventional rational economic actor approach (which uses deterrents to ensure that the costs of undeclared work outweigh the benefits) to be replaced or complemented by a social actor approach which focuses upon improving tax morale. The purpose of this paper is to explore the effectiveness of these two policy approaches in reducing informal sector entrepreneurship.

To evaluate this, data are reported from a 2015 representative survey involving 1,384 face-to-face interviews with owners or managers of small businesses in three South-Eastern European countries namely, Croatia, Bulgaria and FYR Macedonia.

The findings provide support for the ‘social actor’ approach and display that small businesses have a greater propensity to perceive competitors as operating informally when the level of tax morale is lower. Meanwhile, no support for the deterrence measures of the ‘rational economic actor’ model is reported.

The major limitation of the study is that the paper is not able to display the reasons for the low level of tax morale and horizontal trust. Therefore, further in-depth qualitative research is necessary to explain whether and how the low levels of trust are determined by the failures of various formal institutions.

This is the first known study on small businesses which analyses simultaneously two distinct policy approaches that aim to reduce participation in informal entrepreneurship.