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Shadow Economy and Entrepreneurial Entry

  • Estrin, Saul

    ()

    (London School of Economics)

  • Mickiewicz, Tomasz

    ()

    (Aston University)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5053.

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Length: 50 pages
Date of creation: Jul 2010
Date of revision:
Publication status: published in: Review of Development Economics, 2012, 16 (4), 559-578
Handle: RePEc:iza:izadps:dp5053
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  1. Saul Estrin & Ruta Aidis & Tomasz Mickiewicz, 2007. "Institutions and Entrepreneurship Development in Russia: A Comparative Perspective," William Davidson Institute Working Papers Series wp867, William Davidson Institute at the University of Michigan.
  2. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
  3. Torsten Persson & Guido Tabellini, 2006. "Democratic capital: The nexus of political and economic change," Working Papers 308, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Buehn, Andreas & Schneider, Friedrich, 2009. "Corruption and the Shadow Economy: A Structural Equation Model Approach," IZA Discussion Papers 4182, Institute for the Study of Labor (IZA).
  5. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  6. Schneider, Friedrich G. & Buehn, Andreas, 2007. "Shadow economies and corruption all over the world: revised estimates for 120 countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1, pages 1-53.
  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 Mickiewicz, 2007. "Entrepreneurship in Emerging Markets: Which Institutions Matter?," Working Papers 81 Key Words: entrepreneu, CENTRE FOR THE STUDY OF ECONOMIC AND SOCIAL CHANGE IN EUROPE,School of Slavonic and East European Studies,University College London (SSEES,UCL).
  9. Demirguc-Kunt, Asli & Love, Inessa & Maksimovic, Vojislav, 2004. "Business Environment and the Incorporation Decision," Policy Research Working Paper Series 3317, The World Bank.
  10. repec:cup:cbooks:9780521828130 is not listed on IDEAS
  11. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," NBER Working Papers 8852, National Bureau of Economic Research, Inc.
  12. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
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