Shadow economy and entrepreneurial entry

Saul Estrin*, Tomasz Mickiewicz

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish
Pages (from-to)559-578
Number of pages20
JournalReview of development economics
Issue number4
Early online date18 Oct 2012
Publication statusPublished - Nov 2012


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