Toward a Theory of the Informal Economy

Economic activity taking place within the informal sector—traditionally defined as activity unregulated by law but governed by custom or personal ties—represents an emerging frontier for management researchers with interests from alleviating poverty at the bottom of the economic pyramid to entrepreneurship, innovation, or organizational functioning in advanced knowledge economies. A substantial portion of the world's economic activity takes place informally, with many developing nations having more than one half of their output derived from the informal sector and the advanced economies witnessing an increase in informal economic activity. I review the literature in economics, sociology, political science and public policy, and management and show that defining the informal economy proves problematic; current definitions of the informal economy fail to converge around a unitary construct. I then use these disparities in the literature to generate a model of the informal economy clear enough to foster a distinct research agenda.