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

Purpose

The 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.

Methodology

To do so, data are reported from special Eurobarometer surveys conducted in 2007, 2013 and 2019 respectively in eight West European countries (Austria, Belgium, France, Germany, Ireland, Luxembourg, Netherlands and the United Kingdom).

Findings

Using 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 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 Implications

The 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/value

Evidence 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.