Empirical literature on informal activities often builds on macro-economic country estimates, which impedes testing behavioural hypotheses. The European Social Survey, documenting self-reported tax evasion in 26 countries, allows to test individual and institutional factors simultaneously. We model the effect of institutional and social capital factors affecting informal transactions. We predict that informality is fostered by social relations and trust, and curbed by institutional trust. Regulation and taxation fuel informal transactions, while effective enforcement inhibits them.
These predictions are simultaneously tested with individual level data from the ESS, complemented with country level data on regulation, taxation levels and enforcement. Multilevel binary and multinomial logit, fixed-effect, MCMC and AGQ regressions confirm the predictions regarding social capital, trust and tax burden. Contrary to much prior research, we find weak and inconsistent effects of regulation and enforcement, which may also be due to the limited variation of our country sample.