Colonial Legacies and Institutional Legitimacy: Explaining Variation in State-Level Informal Economy Size

Abstract: Why are some states’ economies more formal than others? This question has critical significance for policy-makers who endeavor to tap into the reservoir of tax revenue and entrepreneurship that informal economies contain. More importantly, large informal economies inhibit public good provision and perpetuate the impoverishment, marginaliza- tion, and political instability of select communities. Despite major variation in the size of informal economies across states, most scholarship on the informal economy concentrates only on the causes and consequences of the phenomenon, while neglecting to address its variation. This thesis builds on a canon of scholarship surrounding colonial legacies, new- institutional economics, and institutional legitimacy, by advancing the novel theory that informal economy size is contingent on economic dualism stemming from the colonial period and post-colonial sate legitimacy. I employ a regression analysis and three West African case studies, Senegal, Coˆte d’Ivoire, and Cabo Verde, to evaluate this claim. These findings broaden our understanding of the informal economy and offer new insights for addressing its consequences