How Many Shades of Grey are there? Continuum Conceptualization of Formal/Informal Divide and Its Implications

r4d Working Paper 2016/5 by Rüya Gökhan Koçer

ABSTRACT: As long as firms are concerned, formality and informality as two realms of economy do not refer to a dualistic/binary structure of clear separation but a continuum that consists of a large number of strategic choices. There is a context-dependent grey zone of many shades in between pure formality and pure informality that enable firms to externalize some costs of their production processes so as to increase their profits at the expense of other actors, gradually converting the economy into a zero-sum game. Therefore this study reveals that what is often mentioned as the cost of formality is often the total price of inputs that are essential for production processes, and various forms of informality refers to free-riding on some of these costs that undermines the status of firms as truly capitalist entities.