Tackling self-employment in the informal sector in Europe: evaluating trust-building strategies

Abstract

Purpose – The aim of this paper is to evaluate contrasting ways of tackling self-employment in the informal sector. Conventionally, the participation of the self-employed in the informal sector has been viewed as a rational economic decision taken when the expected benefits outweigh the costs, and thus enforcement authorities have sought to change the benefit-to-cost ratio by increasing the punishments and chances of being caught. Recently, however, neo-institutional theory has viewed such endeavor as a product of a lack of vertical trust (in government) and horizontal trust (in others) and pursued trust-building strategies to nurture voluntary compliance. Design/methodology/approach – To evaluate these contrasting policy approaches, data are reported from special Eurobarometer survey 92.1 conducted in 2019 across 28 European countries (the 27 member states of the European Union and the United Kingdom) involving over 27,565 interviews. Findings – Using probit regression analysis, the finding is that the likelihood of participation in informal self-employment is not associated with the level of expected punishments and chances of being caught, but is significantly associated with the level of vertical and horizontal trust, with a greater likelihood of participation in informal self-employment when there is lower vertical and horizontal trust. Practical implications – The outcome is a call for state authorities to shift away from the use of repressive policy measures that increase the penalties and chances of being caught and toward trust-building strategies to nurture voluntary compliance. How this can be achieved is explored. Originality/value – Evidence is provided to justify a shift toward seeking trust-building strategies by state authorities to engender voluntary compliance among the self-employed operating in the informal sector in Europe.

Keywords

• Tax evasion
• Informal economy
• Tax morale
• Institutional theory
• Public policy
• Europe