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Informal institutions and informal entrepreneurial activity: New panel data evidence from Latin American Countries

Abstract:

Entrepreneurship is an extremely desirable mechanism to generate economic and social progress in a country. The previous literature systematically omitted the role of informal institutions in informal entrepreneurship, particularly in Latin America, a region with high informality. In this context, the purpose of this paper is to examine the influence of informal institutions on the level of informal entrepreneurial activity in Latin America countries. We used a panel data for the period 2004-2015, considering 18 countries in the region. In summary, using the percentage of the adult population identified as own-account workers as a proxy of informal entrepreneurial activity. The results suggest that informal entrepreneurial activity is more abundant in Latin American countries that have lower tax morale. However, generalized trust had no significance. In other words, the social acceptability of tax evasion reduces moral cost, about operating in informality, and therefore informal entrepreneurship is legitimized. Finally, the results suggest that both the formal and informal rules are relevant in the explanation for high rates of informal entrepreneurship in Latin America.