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An institutional theory of the informal economy: some lessons from the United Kingdom

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  • Colin C Williams
  • Ioana Alexandra Horodnic

Abstract

Purpose - – The purpose of this paper is to propose a new way of explaining participation in the informal economy as resulting from the asymmetry between the codified laws and regulations of a society’s formal institutions (government morality) and the norms, values and beliefs of the population that constitute its informal institutions (societal morality). The proposition is that the greater the asymmetry between government morality and societal morality, the greater is the propensity to participate in the informal economy. Design/methodology/approach - – To evaluate this institutional asymmetry theory, the results are reported of 1,306 face-to-face interviews conducted during 2013 in the UK. Findings - – The finding is a strong correlation between the degree of institutional asymmetry (measured by tax morale) and participation in the informal economy. The lower the tax morale, the greater is the propensity to participate in the informal economy. Using ordered logistic regression analysis, tax morale is not found to significantly vary by, for example, social class, employment status or wealth, but there are significant gender, age and spatial variations with men, younger age groups, rural areas and Scotland displaying significantly lower tax morale than women, older people, urban areas and London. Practical implications - – Rather than continue with the current disincentives policy approach, a new policy approach that reduces the asymmetry between government morality and societal morality is advocated. This requires not only changes in societal morality regarding the acceptability of participating in the informal economy but also changes in how formal institutions operate in order for this to be achieved. Originality/value - – This paper provides a new way of explaining participation in the informal economy and reviews its consequences for understanding and tackling the informal economy in the UK.

Suggested Citation

  • Colin C Williams & Ioana Alexandra Horodnic, 2016. "An institutional theory of the informal economy: some lessons from the United Kingdom," International Journal of Social Economics, Emerald Group Publishing, vol. 43(7), pages 722-738, July.
  • Handle: RePEc:eme:ijsepp:v:43:y:2016:i:7:p:722-738
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alexandra Grigorievna POLYAKOVA & Julia Nikolaevna NESTERENKO & Elena Albertovna SVERDLIKOVA, 2018. "A Philosophical Approach of the Modernization Process of Russian Economy and Economic Institutions," Postmodern Openings, Editura Lumen, Department of Economics, vol. 9(1), pages 109-128, March.
    2. Gheorghe Epuran & Claudia-Ioana Ciobanu & Adrian V. Horodnic & Gheorghe Epuran & Claudia-Ioana Ciobanu & Adrian V. Horodnic, 2019. "Green Jobs Creation – Main Element in the Implementation of Bioeconomic Mechanisms," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 21(50), pages 1-60, February.
    3. Colin C WILLIAMS & Slavko BEZEREDI, 2018. "Explaining informal entrepreneurship in South-East Europe: a tax morale approach," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 9, pages 47-68, December.
    4. Colin Williams, 2020. "An Institutional Theory of Tax Non- Compliance in Bulgaria: a Tax Morale Approach," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 1, pages 33-49, March.
    5. repec:aud:audfin:v:21:y:2019:i:50:p:60 is not listed on IDEAS
    6. Williams Colin C. & Bezeredi Slavko, 2018. "Explaining and Tackling Under-Declared Employment in FYR Macedonia: The Employers Perspective," South East European Journal of Economics and Business, Sciendo, vol. 13(2), pages 19-31, December.

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