Introduction: Why the Informal Economy Matters to Management

Abstract

This chapter hopes to link the study of informal economy to the mainstream literatures and theoretical paradigms in strategic management. The Base of the Pyramid's (BoP) informal marketplaces provide a new and different context within which to 'stress test' Transaction Cost Economics (TCE), and Contract Theory, paradigms grounded and elaborated within the institutional framework of the developed world. Firstly, the chapter identifies the contribution of TCE, and Contract Theory, as the author uses this set of constructs and logic to show why and when hybrid governance represents an efficient, optimal governance/contract structure in informal economy contexts. Secondly, the author contributes to Contract Theory by examining how optimal governance structures differ in informal versus formal, developed-world markets. The chapter focuses on two important features of BoP's markets: a prevalence of informal economic activity and small scale, low technology operations. It performs a comparative economic analysis across contexts to understand the viability of market, hybrid forms, or hierarchy as optimal governance forms.

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