Explaining purchases from the informal economy

What is it about?

Participation in the informal economy has been predominantly explained from a supply-side perspective by evaluating the rationales for people working in this sphere. Recognising that many transactions in the informal economy are often instigated by customers, exemplified by purchasers asking “how much for cash?”, the aim of this paper is to explain the informal economy from a demand-side perspective by evaluating citizens’ rationales for making purchases in the informal economy. Here, we test three potential explanations for acquiring goods and services in the informal economy, grounded in rational economic actor, social actor and formal economy imperfections theoretical perspectives.

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Why is it important?

To do this, a 2013 Eurobarometer survey, involving 27,563 face-to-face interviews conducted in 28 European Union member states is reported. The finding is that all three rationales apply but the weight given to each varies across populations. A multinomial logit regression analysis then pinpoints the specific groups variously using the informal economy to obtain a lower price, for social or redistributive rationales, or due to the failures of the formal economy in terms of the availability, speed and quality of provision. The outcome is to reveal that the policy approach of changing the cost/benefit ratios confronting purchasers will only be effective for those purchasers citing a lower price as their prime rationale. Different policy measures will be required for those making informal economy purchases due to the shortcomings of the formal economy, and for social ends. These policy measures are then discussed.

Perspectives