WHAT FACTORS MOTIVATES THE SHADOW ECONOMY? EVIDENCE FROM LAGOS AND KANO STATES

Abstract

The shadow economy (SE) is made up of economic agents, avoiding relevant regulations on their activities. The avoidance of regulations constitutes a cost to the government, such as lost tax revenues which would have aided development. Over time, the shadow economy was supposed to fade away as the formal sector grew. Years of growth without development, however, have rendered this assumption an illusion. The sector has proceeded to flourish rather than decrease in magnitude. The prevalence, especially among micro-enterprises, has been a long term challenge for policymakers. This study examines the factors that motivate micro-enterprises to participate in SE activities in Nigeria. A survey was conducted in Lagos and Kano states to explore factors that influence participation. The purposive sampling technique was used to select 410 micro-enterprises, while the probit model was employed to evaluate the model. Non-registration of the enterprise was used as a proxy for shadow economy activities. Findings revealed that controlling for other factors, age, marital status, credit sources, and tax morale were not significant factors in explaining participation whereas lower educational levels, small business size, and shorter working hours were important factors motivating participation in the shadow economy. This study, therefore, suggests that the government focusses on providing opportunities that help encourage the growth of microenterprises.