Entrepreneurship, corruption, and the size of US underground economies

Travis Wiseman (Department of Finance and Economics, College of Business, Mississippi State University, Mississippi State, MS, USA)

Journal of Entrepreneurship and Public Policy

ISSN: 2045-2101

Publication date: 2 November 2015



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.


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.


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.


This study, to the author’s knowledge, is the first to attempt “connecting the dots” between entrepreneurship, corruption, and shadow economy size.



JEL Classification — H71, K1, K4, L26, O10, O18, O51, R11

The author gratefully acknowledge financial support from the Charles G. Koch Foundation and the European Social Fund’s Doctoral Studies and Internationalisation Programme, DoRa. For helpful comments and suggestions the author thank Andrew Young, Russell Sobel, Roger Congleton, William Trumbull, Brian Cushing, Adam Pellillo, Josh Hall, and two anonymous referees at the Journal of Entrepreneurship and Public Policy.


Wiseman, T. (2015), "Entrepreneurship, corruption, and the size of US underground economies", Journal of Entrepreneurship and Public Policy, Vol. 4 No. 3, pp. 313-330. https://doi.org/10.1108/JEPP-04-2014-0018

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