Why Consumers Purchase Goods or Services in the Informal Economy?

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Anneke Zwart
Student (University), Netherlands

Why Consumers Purchase Goods or Services in the Informal Economy?

Williams and Martinez-Perez (2014) review research about customer behavior in the informal economy. The informal economy is that part of the economy not regulated, monitored or taxed by the state. As a result, income obtained in the informal economy is not included in the Gross National Product (GNP) of countries. Other maybe more familiarly terms of the informal economy are: the black market or the shadow market.
In their study they describe the possible reasons for consumers to participate in the informal economy:
1. Financial Gain: consumers could be rational persons that weigh up the benefits versus the costs and risks of purchasing a good in the informal economy. If the financial benefits of purchasing a good in the informal economy exceeds the costs of their actions and of disregarding rules, a rational consumer will purchase the good or service in the informal economy.
2. Social/redistributive reason: An alternative view does not see consumers as rational but rather as social actors. This view makes notice of the fact that consumers might participate in the informal economy so as to give unemployed persons opportunities by giving them money without any charity connotation.
3. Formal Economy Failure: failings in the formal economy can result in scarcity and unreliability of formal businesses. Furthermore, these failures might also lead to insufficient quantities and qualities of the provided products and services. In this case, the informal economy is just a solution for a problem of the formal economy. Consumers will therefore continue to buy goods and services in the informal economy, until the problems in the formal economy have been resolved.
Source: Williams, C.C., and A. Martinez-Perez (2014) “Why do consumers purchase goods and services in the informal economy?”Journal of Business Research Vol. 67 Iss. 5 pp. 802-806

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