Unproductive Entrepreneurship, Institutional Change, and the Informal Economy: Entrepreneurial Potential in Moldova

Abstract

Entrepreneurship is often ubiquitous in developing countries, and many entrepreneurs operate in the informal economy and are often involved in unproductive activity. While entrepreneurs seek to maximize their returns given the existing institutions, they also respond to the level of state capacity and the supporting structures of national and regional governance. We tackle the question of governmental legitimacy given that entrepreneurs in Eastern Europe operate in states with weak governance institutions. We test the degree to which the standard maximization of private returns decision holds by surveying informal entrepreneurs in the Republic of Moldova. The institutions that determine high versus low state capacity motivate entrepreneurs toward a productive or unproductive use of resources and the capacity of government also impacts their pursuit of private returns resulting in higher social costs. We find that Moldovan entrepreneurs evade taxation for reasons beyond simple maximization rules.