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Shadow Economy and Entrepreneurial Entry

Author

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  • Estrin, Saul

    () (London School of Economics)

  • Mickiewicz, Tomasz

    () (Aston University)

Abstract

We analyze theoretically and empirically the impact of the shadow economy on entrepreneurial entry, utilising 1998-2005 individual-level Global Entrepreneurship Monitor data merged with macro level variables. A simple correlation coefficient suggests a positive linear link between the size of the shadow economy and entrepreneurial entry. However, this masks more complex relationships. With appropriate controls and instrumenting for potential endogeneity where required, the impact of the shadow economy on entry is found to be negative, based on a linear specification. Moreover, there is also evidence of nonlinearity: entrepreneurial entry is least likely when the shadow economy is of medium size. We attribute the negative effects of shadow economy on entry to perceived strong competition faced by new entrants when the shadow economy is widespread. 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 strong, the negative impact of the shadow economy is weaker.

Suggested Citation

  • Estrin, Saul & Mickiewicz, Tomasz, 2010. "Shadow Economy and Entrepreneurial Entry," IZA Discussion Papers 5053, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5053
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    1. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
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    7. Mihir Desai & Paul Gompers & Josh Lerner, 2003. "Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe," NBER Working Papers 10165, National Bureau of Economic Research, Inc.
    8. Ruta Aidis & Saul Estrin & Tomasz Marek Mickiewicz, 2007. "Entrepreneurship in Emerging Markets: Which Institutions Matter?," UCL SSEES Economics and Business working paper series 81, UCL School of Slavonic and East European Studies (SSEES).
    9. Demirguc-Kunt, Asli & Love, Inessa & Maksimovic, Vojislav, 2006. "Business environment and the incorporation decision," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2967-2993, November.
    10. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
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    Cited by:

    1. repec:spr:intemj:v:13:y:2017:i:3:d:10.1007_s11365-016-0427-2 is not listed on IDEAS
    2. repec:ers:ijebaa:v:iv:y:2016:i:2:p:80-92 is not listed on IDEAS
    3. Niklas Elert & Magnus Henrekson, 2016. "Evasive entrepreneurship," Small Business Economics, Springer, vol. 47(1), pages 95-113, June.
    4. Aparicio, Sebastian & Urbano, David & Audretsch, David, 2016. "Institutional factors, opportunity entrepreneurship and economic growth: Panel data evidence," Technological Forecasting and Social Change, Elsevier, vol. 102(C), pages 45-61.
    5. Goel, Rajeev K. & Nelson, Michael A., 2016. "Shining a light on the shadows: Identifying robust determinants of the shadow economy," Economic Modelling, Elsevier, vol. 58(C), pages 351-364.
    6. Djula Borozan & Josip Arneric & Ilija Coric, 0. "A comparative study of net entrepreneurial productivity in developed and post-transition economies," International Entrepreneurship and Management Journal, Springer, vol. 0, pages 1-26.
    7. Sugata Marjit & Saibal Kar, 2012. "Firm Heterogeneity, Informal Wage and Good Governance," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 527-539, November.
    8. repec:eee:tefoso:v:123:y:2017:i:c:p:271-282 is not listed on IDEAS
    9. repec:ers:ijebaa:v:iv:y:2016:i:4:p:3-16 is not listed on IDEAS
    10. Erkko Autio & Kun Fu, 2015. "Economic and political institutions and entry into formal and informal entrepreneurship," Asia Pacific Journal of Management, Springer, vol. 32(1), pages 67-94, March.
    11. Rajeev Goel & James Saunoris & Xingyuan Zhang, 2015. "Innovation and underground entrepreneurship," The Journal of Technology Transfer, Springer, vol. 40(5), pages 800-820, October.

    More about this item

    Keywords

    entrepreneurship; shadow economy;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D2 - Microeconomics - - Production and Organizations
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • P14 - Economic Systems - - Capitalist Systems - - - Property Rights

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