Why do entrepreneurs operate at different levels of informality?

What is it about?

Based on the recognition that enterprises operate at different levels of informality, this paper evaluates the determinants of their degree of informalization. To do so, a 2016 survey of the varying degrees of informalization of 171 entrepreneurs in Ghana is reported.

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Photo by Steven Su on Unsplash

Photo by Steven Su on Unsplash

Why is it important?

The finding is that only 21 percent of enterprises were wholly informal and 16 percent wholly formal. Nearly two-thirds (63 percent) were neither wholly informal nor wholly formal. Higher levels of informalization are significantly associated with younger entrepreneurs, those with lower levels of educational attainment, lower household incomes, and younger enterprises. It is also significantly associated with the wider institutional compliance environment. Higher levels of informality are present among entrepreneurs unaware of the need for registration, who lack vertical trust (i.e., do not believe that the state does anything for them, and perceive there to be public sector corruption), view informality as normal (i.e., a normal practice in their family), and view all similar businesses as operating informally (i.e., lack horizontal trust). The paper concludes by discussing the theoretical and policy implications

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