In Institutions We Trust? Trust in Government and the Allocation of Entrepreneurial Intentions

Whether entrepreneurship generates economic growth depends on the institutional environment due to its impact on the mix of productive and unproductive entrepreneurship in the economy. The incentive structure embedded in each society affects whether talented people become entrepreneurs and potentially, the extent to which they engage in more productive forms of entrepreneurship. We examine how trust in institutions affects the entrepreneurial intentions of potentially productive entrepreneurs. We utilize the unique event surrounding the impeachment of South Korea’s previous president. The event improved people’s trust in the government because it was ultimately the people’s protests and demands that led to the impeachment of the president for influence peddling and extracting personal rents from businesses. By surveying the same individuals before and after the impeachment ruling, we identify people’s changes in trust in government and various institutions. We find that increased trust in institutions increases one’s intent to start a business within five years. Moreover, we show that the relationship between trust in institutions and entrepreneurial intention is significantly stronger for engineering majors from top universities.