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

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.