Shadow Economy and Entrepreneurial Entry

Abstract

The impact of the shadow economy on entrepreneurial entry across countries is analyzed utilising 1998–2005 individual‐level Global Entrepreneurship Monitor data and national macro‐economic variables. A simple correlation coefficient suggests a positive relationship between the size of the shadow economy and the likelihood of entrepreneurial entry. However, this masks more complex relationships, if, as argued, the shadow economy is an embedded social phenomenon. With appropriate controls and instrumenting for potential endogeneity, the impact of the shadow economy on entry in a linear specification is found to be negative. Further, there is evidence of a U‐shaped relationship: entrepreneurial entry is least likely when the shadow economy amounts to about a quarter of gross domestic product (GDP). At the individual level, an extensive shadow economy has a more negative impact on respondents who are risk averse. In addition, in the economies where property rights are stronger, the negative impact of the shadow economy is weaker.

To Pay or Not to Pay? Business Owners’ Tax Morale: Testing a Neo-Institutional Framework in a Transition Environment

“…In that case, the situation becomes very difficult for entrepreneurs in the formal sector, who face both competition from the informal economy firms and high costs if they choose to remain fully in the official domain. If such a situation is left unchecked, a more serious crisis may follow, as vividly exemplified by the recent case of Greece (Estrin and Mickiewicz 2012;see also: Bird et al 2006;Mathias et al 2015).…”

“…Therefore, the superior, first-best solution is always a sound tax system matched by a government that supports property rights and creates uniform opportunities for business (De Soto 1989, 2001). An informal economy is detrimental to entrepreneurship (De Paula and Scheinkman 2011;Estrin and Mickiewicz 2012), and therefore, understanding the factors that drive tax morale, especially in the business context, is critical.…”

“…This leads to dual business structures: formal versus informal. This duality not only implies suboptimal choices of business strategies, but is also detrimental to the formation of high growth businesses (Estrin and Mickiewicz 2012). Under such a scenario, economic development both at the local and at the country level suffers.…”

Institutional factors, opportunity entrepreneurship and economic growth: Panel data evidence

“…Thus, confidence in one's skills affects positively the capacity to create new businesses by opportunity with a higher potential for growth. In this sense, Estrin and Mickiewicz (2012) find empirical evidence about the impact of confidence in one's skills on entrepreneurship. According to these authors, a low level of confidence impacts negatively on entrepreneurship.…”

“…Consequently, we propose the following hypotheses: Another informal factor considered in this paper is the confidence in skills. This institution is also very relevant to the decision to start a business, in particular those new businesses that require a high level of knowledge (Estrin and Mickiewicz, 2012). People who believe in their own abilities and skills are used to perceiving a lower level of uncertainty and having more confidence in their role as entrepreneurs and a higher likelihood of starting a new business venture (Estrin and Mickiewicz, 2012).…”