Entrepreneurship and economic freedom: cross-country evidence from formal and informal sectors

The paper empirically examines the effect of economic freedom on the average prevalence of formal and informal entrepreneurship. Whereas the formal entrepreneurship and economic freedom nexus has been studied, the influence of economic freedom on informal entrepreneurship is less forthcoming. The results, based on cross-country data and after accounting for possible reverse causality, show that economic freedom promotes formal entrepreneurship and inhibits informal entrepreneurship. Furthermore, the return from economic freedom is greatest in countries with a relatively higher prevalence of formal and informal entrepreneurship.