Poverty and informal economy participation

This paper uses a household survey of the Romanian informal economy to analyse the effects of poverty on informal economy participation. We begin by developing a simple theoretical model, which shows that the participation is driven by low income and the gap between desired and actual income level. We then estimate the determinants of households’ participation in the informal economy. Empirical findings are consistent with the theoretical prediction. In addition, a positive association between husbands and wives working in the informal economy implies the deep poverty faced by a family whose head participates in the informal economy.