Formalization and institutional trust: the role of institutional trust in formalizing Morocco’s informal economy

Abstract

The informal economy represents a major component of economic activities in many developing countries, including Morocco. Formalizing this economy is important for improving social protection, broadening the tax base, and increasing productivity. However, this transition is often hindered by distrust towards formal institutions. This study examines the impact of trust in institutions on the intention to formalize informal economic activities, based on a sample of 389 informal economic actors from the Morocco. Relying on transaction theory, the study proposes that trust in institutions, perception of their quality, favorable regulations, and social norms positively influence the intention to formalize. Data were collected through interviews and analyzed using an Ordered Probit Model. The results show that trust in institutions and a positive perception of their quality significantly increase the intention to formalize. Favorable regulations also have a positive impact, although to a lesser extent. In contrast, social norms have no significant effect. Education and age also play a role, with younger and more educated individuals showing a greater inclination to formalize. These findings suggest that policies aimed at strengthening trust in institutions, improving the quality of regulations, and investing in education can encourage the formalization of informal economic activities, thereby contributing to sustainable and inclusive economic development.