Understanding informality in the intercity passenger ground transport market: A stylized model and policy implications

Based on a literature review on informality, this study builds a theoretical framework and proposes an original stylized model to understand transport informality in the context of a developing economy. Using simple economic premises and a steady state condition to explain supply behavior and analyzing passenger's preferences to explain demand, the model aggregates individual demand and supply units to explain equilibrium under three interconnected segments of formal, informal and illegal operators that characterize the transport market. The model raises behavioral variables that although common in the business world, are not dealt with much in the standard literature on informality. Transport operators’ propensities to evade the norms are strategic managerial decisions that are graduated through operator's size, cost-benefit analysis and other embedded and institutional variables, to compensate for their lower productivity. On the demand side, passengers behavior is influenced by how highly individuals value fares versus travel time, safety, comfort and quality of service. The model allows for a dynamic analysis of interactions and tensions between formal and informal operators and in their relation with the State norms and enforcement actions. The model specifications provide a set of instruments and ideas that policymakers can use to design effective policies to address the problem of informality and improve ground transport formalization. Policies are classified according to their normative, enforcement, and promotional character, and then the focus shifts to strategies that change supply and demand evasive behavior, as well as to address institutional failures and embedded social and cultural practices. To tackle informality, some interesting and practical examples are presented in the paper. Market formalization depends not only on how the State implements policies but also on how passengers and formal, illegal, and informal enterprises react to those policies.