Understanding the Firm in the Informal Economy: A Research Agenda

Informal firms prevail and preoccupy a dominant share of the economic activity in many developing countries. Yet, few attempts have been made to systematically integrate dominant theories of the firm with the empirical importance of informal enterprises. The purpose of this paper is to review established theories of the informal economy and the firm, and to explore potential for cross-fertilization to better understand the nature of the firm in the informal economy. We seek to convey two basic points: First, as informal economy firms vary in form, structure, and strategies, a systematic inquiry of their heterogeneous and idiosyncratic nature is warranted. Second, significant opportunities for future development research reside at the interface between existing theoretical explanations of the informal economy (dualistic, structuralist legal, and voluntarist theories) and dominant theories of the firm (contractual and competence theories). We discuss in detail three main themes for future development research seeking to understand informal economy firms: (i) Contract mechanisms and enforcement; (ii) Learning strategies; and (iii) Resource and capability development.