Conventionally, a rational economic actor approach has been adopted.
To advance understanding of how to tackle the urban informal economy, therefore, section two reviews these rational economic actor and social actor approaches and develops hypotheses to test these two approaches, as well as their interaction effects.
The origins of a rational economic actor approach lie in the classic utilitarian theory of crime developed by Jeremy Bentham (Bentham, 1788) and Cesare Beccaria (Beccaria, 1797).
To evaluate this rational economic actor approach in relation to urban economies, therefore, the following hypothesis can be tested:
Rational economic actor hypothesis (H1): The greater the perceived penalties and risk of detection, the lower is the likelihood of participation in the urban informal economy, ceteris paribus.
Although this school of thought went into abeyance with the rise of the rational economic actor model from the 1970s, since the turn of the millennium, it has resurfaced (see for example, Alm et al., 2012; Kirchler, 2007; Torgler, 2007, 2011).
Although some argue that this social actor approach is an alternative to the rational economic actor approach (Eurofound, 2013; Williams, 2014a), the vast majority of scholars have asserted that these are complementary rather than competing approaches.
These results thus confirm the rational economic actor approach; increasing the actual or perceived penalties and risks of detection reduces the likelihood of urban populations participating in the informal economy.
Is it the case however, that urban populations decrease their level of participation in the informal economy if a government combines the conventional rational economic actor approach of increasing the level of punishments and/or risk of detection, with the social actor approach of improving tax morale?