Abstract This paper surveys the literature on the definitions and theories of the informal economy (IE). It outlines the main differences in the definitional approaches of informality and proposes a definition for the IE that may be consistent with measurement and policy. The literature review distinguishes three, not mutually exclusive, approaches to the IE: the “neoclassical,” the “macro‐econometric,” and the “conceptual” perspectives. I conclude the survey by outlining a framework that points out the main differences and similarities among the schools of thought on the nature of the IE. From a normative perspective, a leading recommendation emerges: a “one‐size‐fits‐all” policy response is inadequate to deal with the heterogeneous nature of the IE. Policy measures should be tailored around the distinct segments of the IE grounded in terms of characteristics, contexts, and needs of the informal units.
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