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This paper investigates the relationship between economic freedom and income growth and inequality across U.S. states over the period 1979-2011. The focus is on market income at the top and bottom of the income distribution. Results show that increases in overall freedom are associated with average income growth. When viewed separately, an increase in overall freedom is associated with larger income growth rates for income earners in the bottom 90% relative to the top 10%. Interestingly, results show that increases in overall economic freedom are related to larger relative growth rates for the top 10% incomes within high-income states and larger relative growth rates for the bottom 90% incomes within low-income states. Top-to-bottom income ratio regressions suggest a negative and statistically significant relationship between economic freedom and income inequality. (JEL D63, P16, R11)

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Purpose – Using state-level data on productive and unproductive entrepreneurship, shadow economy size, and public official corruption, the purpose of this paper is to examine whether formal sector productive (unproductive) entrepreneurial activity is associated with lower (higher) levels of informal economic activity. Design/methodology/approach – Additionally, the author aims to connect US state-level entrepreneurship, shadow economy size, and corruption by asking whether corruption affects entrepreneurial outcomes primarily through its effects on the shadow economy. The author contends that if this is the case, then estimates of corruption should serve as a good instrument for shadow economy size in regressions on formal sector entrepreneurial outcomes. Findings – Results from OLS regressions suggest that shadow economy size shares a strong, negative (positive), and statistically significant relationship with productive (unproductive) entrepreneurship. These results are fairly robust to GMM estimation. Additionally, the author finds that corruption is a strong instrument for shadow economy size; one for which validity cannot be rejected in regressions on productive, and net entrepreneurship scores. Research limitations/implications – However, the author cannot safely assert that the author finds evidence of the shadow economy serving as a primary channel through which corruption affects observed entrepreneurial outcomes. Failure to reject validity of the corruption instrument is, at best, suggestive of the primacy of the entrepreneurial choice between formal and informal sector participation. Originality/value – This study, to the author’s knowledge, is the first to attempt “connecting the dots” between entrepreneurship, corruption, and shadow economy size.

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