Explaining participation in the informal economy: An institutional incongruence perspective

Drawing inspiration from institutional theory, a small sub-stream of literature has proposed that participation in the informal economy arises from the lack of alignment of a society’s formal institutions (i.e. its codified laws and regulations) with its informal institutions (i.e. the norms, values and beliefs of its population). To further advance this explanation, this article reports a 2013 Eurobarometer survey involving 27,563 face-to-face interviews across 28 European countries. The finding is that there is a strong association between the degree to which formal and informal institutions are unaligned and participation in the informal economy. The greater is the asymmetry between the formal and informal institutions, the more likely is participation in the informal economy at the individual-, population group- and country-level. A new policy approach for tackling the informal economy which focuses upon reducing this institutional incongruence is then discussed.