How can entrepreneurship in the informal economy be transformed into legitimate entrepreneurship

What is it about?

When tackling the informal economy, an emergent literature has called for the conventional rational economic actor approach (which uses deterrents to ensure that the costs of undeclared work outweigh the benefits) to be replaced or complemented by a social actor approach which focuses upon improving tax morale. The purpose of this paper is to explore the effectiveness of these two policy approaches in reducing informal sector entrepreneurship. To evaluate this, data are reported from a 2015 representative survey involving 1,384 face-to-face interviews with owners or managers of small businesses in three South-Eastern European countries, namely, Croatia, Bulgaria and FYR Macedonia.

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Why is it important?

The findings provide support for the “social actor” approach and display that small businesses have a greater propensity to perceive competitors as operating informally when the level of tax morale is lower. Meanwhile, no support for the deterrence measures of the “rational economic actor” model is reported.

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