Abstract

In many developing countries, the majority of economic activity takes place in microenterprises operating out of sight of government regulations and established institutions. These ‘shadow’ firms are oftentimes described as operating in the informal economy and are often the modus operandi of individuals seeking to exit poverty. However, empirical research on informal economy firms has remained relatively scant. We examine fundamental but often overlooked factors in explaining firm performance - financial literacy and role models. These factors help guide decisions about the attractiveness of a perceived opportunity and illustrate the basic skills needed to make business decisions. Generally, entrepreneurship research focuses on the right tail of human capital (i.e., high levels of education or expertise) and ignores the left tail (i.e., individuals lacking fundamental knowledge). Financial literacy and role models fit into the left tail. Our study adds needed empirical work on the performance of entrepreneurial firms and extends discussions of human capital in the informal economy.

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