Informal Economy, Regulation & Productivity
Research Paper Title:
“A country-level institutional perspective on entrepreneurship productivity: The effects of informal economy and regulation”
Authors:
Ashkan Fredström (Hanken School of Economics)
Juhana Peltonen (Hanken School of Economics)
Joakim Wincent (University of St. Gallen)
Background:
Although the authors study the informal economy, a main theme of this paper is institutional theory and specifically institutional incongruence. In short, formal regulations and policies could have different impacts, expected or often unexpected, depending on the informal institutional settings. If informal institutions are not in line with the introduced policies, the results of the policies could be unexpectedly destructive. When introducing new policies to achieve an improvement, it is important to keep in mind that the social and informal rules of the game not supporting the policies could be of hindrance. The researchers recommend policy makers to design the policies for achieving improvements with a consideration of their informal institutions, even if the same policy is tested and works in another society.
Methodology:
Sample: Global Entrepreneurship Monitor (GEM) - a multisource country-level panel dataset
Sample Size: 374 country-year observations from 60 countries (2005–2014)
Analytical Approach: Fixed-effects regression and Difference GMM estimator
Hypothesis:
The larger the informal economy, the lower the entrepreneurship productivity. [supported]
Governance quality moderates the negative relationship between the informal economy's size and entrepreneurship productivity: the higher the governance quality, the stronger the negative relationship between the informal economy's size and entrepreneurship productivity. [supported]
Results:
The informal rules of the game shape outcomes of governance improvements.
Misaligned formal and informal institutions result in institutional incongruence.
Institutional incongruence should be minimized when improving governance.
Governments' efforts to improve governance may make things even worse.
The informal economy mostly lowers entrepreneurship productivity.
Conclusion:
The informal economy’s size is negatively associated with entrepreneurship productivity. However, where governance quality is low, that my not apply. Cognitive and normative institutions institutions can implement change in the informal economy’s size without generating high institutional incongruence.