Abstract

In this paper, using a hierarchy of institutions posited by Oliver Williamson (2000), we analyze how informal institutions, formal institutions, governance, and resource allocation influence the rate and type of entrepreneurship. Governance is important for entrepreneurs because they have to interact with bureaucrats often and as the government size increases. The second level of the Williamson’s model is formal/regulatory institutions. Regulatory institutions are critical because they reduce uncertainty and risk associated with entrepreneurial activity. Regulations related to tax policies can influence the type of entrepreneurial activity undertaken by an entrepreneur because tax policies affects the return on investment by the entrepreneur. Informal institutions are at the top of the hierarchy because informal institutions are embedded in the society that gradually can become habitual and can be hindrance for productive activity. We consider corruption an ideal example of this because Corruption is embedded in society in many developing countries. In this article we use corruption as a moderator to determine how informal institutions of a country interact with formal institutions and governance to influence various types of entrepreneurial activities.

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