Economic Governance and the Paradox of the Informal Economy: How Institutional Entrepreneurs exploit Robust Action in a Polycentric System

Abstract

"During more than half a century studies have regarded formality and informality as two fully separate constructs. Early work of Ostrom started to address the importance of management of common property regimes and shed light on informal arrangements. Social science literature views informal market as temporary and focus on the transition towards formality. This struggle to explain the persistence of informality comes down to what scholars characterize as a fundamental paradox of informality –reconcile growth of informality with stability. This paradox creates two problems for conventional approaches. First, much of the work on the emergence of informality is based on the Durkheimian understanding of trust and market governance. Second, the dominant approach views from law and economics, can’t conceive the of growth informality because of the necessity of the formal protection of property right. This article attempts to resolve this paradox. We highlight the importance of creating an authority structure that builds power and legitimacy through ties to government institutions in the formal sector. We build on Ostrom’s concept of polycentricity to understand how informal self-regulation may emerge and adapt, but then can destabilize as key initial rules are violated. We embrace the comparative capitalism understanding of institutions as configurations of rules and resources. Third, in building on the concept of robust action, we identify the strategies that market makers use to bring stability when Ostrom’s rules are violated. To build and illustrate our approach, we enact a four months ethnographic study of La Salada, the largest informal, illicit market in Latin America."