Date: 2023
Type: Article
Formal and informal institutions : understanding the shadow economy in transition countries
Journal of institutional economics, 2023, Vol. 19, No. 5, pp. 656-672
GËRXHANI, Klarita, CICHOCKI, Stanislaw, Formal and informal institutions : understanding the shadow economy in transition countries, Journal of institutional economics, 2023, Vol. 19, No. 5, pp. 656-672
- https://hdl.handle.net/1814/76230
Retrieved from Cadmus, EUI Research Repository
This paper reviews work that tests (1) how formal and informal institutions, and especially their interaction, affect participation in the shadow economy in transition countries; and (2) how participating in these shadow economies affects individuals' well-being. The key findings are that a clash of individuals' perceptions of formal institutions with their informal institutions increases involvement in the shadow economy. Conversely, a trustworthy relationship with the government and other individuals makes people more inclined to comply. The importance of their social and institutional context also appears in how individuals' involvement in the shadow economy relates to their well-being. These findings complement insights from the rich literature on tax morale, on the exchange between public institutions and citizens and between culture and institutions more generally. The findings also contribute to the institutional economic literature by empirically showing that: (1) focusing on formal institutions alone, that is strengthening the rule of law, is a necessary but insufficient response to the shadow economy; (2) taking informal institutions, such as individuals' trust and tax morale, into account is of equal importance; and (3) most importantly, formal and informal institutions go hand in hand, and their interaction should be an essential part of the new institutional perspective.
Additional information:
Published online: 11 January 2023
Cadmus permanent link: https://hdl.handle.net/1814/76230
Full-text via DOI: 10.1017/S1744137422000522
ISSN: 1744-1374; 1744-1382
Publisher: Cambridge University Press
Sponsorship and Funder information:
This article was published Open Access with the support from the EUI Library through the CRUI - CUP Transformative Agreement (2023-2025)
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