Ravi Kanbur: A Holistic Framework

In 2009, Ravi Kanbur, Professor of Economics at Cornell University, posited a conceptual framework for distinguishing between four types of economic responses to regulation, as follows:

A. Stay within the ambit of the regulation and comply.
B. Stay within the ambit of the regulation but not comply.
C. Adjust activity to move out of the ambit of the regulation.
D. Outside the ambit of the regulation in the first place, so no need to adjust.
Under the Kanbur framework, category A is “formal.” The rest of the categories are “informal,” with B being the category that is most clearly “illegal.” What about categories C and D? For both of these categories, Kanbur explains, “the regulation does not apply – for example, because the regulation stipulates minimum enterprise size, and these enterprises are below that minimum size. But there is clearly a difference between them – category C has adjusted size to come below the minimum size, while category D was below the minimum size in any case so the regulation has not affected it at all. Should either, neither, or both, of these be labeled ‘informal’?” (Kanbur 2009).

Kanbur argues that using a single label “informal” for B, C, and D obscures more than it reveals – as these are distinct categories with specific economic features in relation to the regulation under consideration. While acknowledging that it is useful to have aggregate broad numbers on the size and general characteristics of the informal economy, Kanbur concludes that disaggregation provides for better policy analysis.