Tackling the Urban Informal Economy: Some Lessons from a Study of Europe’s Urban Population

Abstract

The aim of this paper is to evaluate themost effective way of tackling the urban informaleconomy. It has been recently argued that theconventional rational economic actor approach(which increases the costs of participating in theurban informal economy so that they outweighthe benefi ts) should be replaced or complementedby a social actor approach which focusesupon improving tax morale. To evaluate the effectivenessof these supposedly alternative approachesto tackling the participation of urbanpopulations in the informal economy, we reportthe results of face-to-face interviews conductedin 2013 with 17,886 urban dwellers across the 28Member States of the EU. Multilevel logistic regressionanalysis reveals that both approachesare effective in signifi cantly reducing the urbanpopulation’s participation in the informal economy.When tax morale is high, however, the rationaleconomic actor approach of increasing thecosts has little impact on reducing the probabilityof engagement in the informal economy. The paperconcludes by calling for greater emphasis onimproving the tax morale of the urban populationso as to tackle the informal economy in the urbanareas of Europe and beyond.

Keywords

• informal sector, institutional theory, tax evasion, tax morale, public policy, urban development, european union