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Entrepreneurship, corruption, and the size of US underground economies

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  • Travis Wiseman

Abstract

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.

Suggested Citation

  • Travis Wiseman, 2015. "Entrepreneurship, corruption, and the size of US underground economies," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 4(3), pages 313-330, November.
    • Handle: RePEc:eme:jepppp:v:4:y:2015:i:3:p:313-330
    DOI: 10.1108/JEPP-04-2014-0018
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    Citations

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    Cited by:

    1. Aziz N. Berdiev & James W. Saunoris, 2018. "Corruption and Entrepreneurship: Cross‐Country Evidence from Formal and Informal Sectors," Southern Economic Journal, John Wiley & Sons, vol. 84(3), pages 831-848, January.
    2. Esa Mangeloja & Tomi Ovaska & Ryo Takashima, 2022. "Entrepreneurial choices depend on trust: Some global evidence," Journal of International Entrepreneurship, Springer, vol. 20(4), pages 564-590, December.
    3. Pawel DEC & Piotr MASIUKIEWICZ, 2019. "Financial Services on the Black Market," Romanian Journal of Economics, Institute of National Economy, vol. 48(1(57)), pages 48-62, June.
    4. Akbal, Can, 2021. "Entrepreneurship and the Shadow (Informal) Economy," MPRA Paper 109739, University Library of Munich, Germany.
    5. Livio Ferrante & Stefania Fontana & Francesco Reito, 2021. "Mafia and bricks: unfair competition in local markets and policy interventions," Small Business Economics, Springer, vol. 56(4), pages 1461-1484, April.
    6. Kalyuzhnova, Yelena & Belitski, Maksim, 2019. "The impact of corruption and local content policy in on firm performance: Evidence from Kazakhstan," Resources Policy, Elsevier, vol. 61(C), pages 67-76.
    7. Rajeev K. Goel & James W. Saunoris, 2017. "Dynamics Of Knowledge Spillovers From Patents To Entrepreneurship: Evidence Across Entrepreneurship Types," Contemporary Economic Policy, Western Economic Association International, vol. 35(4), pages 700-715, October.
    8. Farzana Chowdhury & David B. Audretsch & Maksim Belitski, 2019. "Institutions and Entrepreneurship Quality," Entrepreneurship Theory and Practice, , vol. 43(1), pages 51-81, January.

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