Trust or distrust: entrepreneurs vs. self-employed

Trust and entrepreneurship are important determinants of economic development. The two, however, have been discussed separately and crudely defined. This paper distinguishes between trust and distrust and constructs a theoretical framework to understand their relations with (innovative) entrepreneurship and (routine) self-employment. The framework shows that entrepreneurs, who make an unverifiable investment, can rely on low distrust and high trust to overcome the hold-up risk. In contrast, the self-employed, who make a verifiable investment, can rely on high distrust and high trust to monitor and verify the terms of the contract. This paper also empirically analyzes the World Values Survey by relating distrust and trust to the choice of employment type (among entrepreneurship, self-employment, paid employment, or unemployment) in multinomial logit models. The results are largely consistent with the predictions of the theoretical framework.