Institutions, Latent Entrepreneurship, and Self–Employment: An International Comparison

Abstract

This paper examines how the institutional environment in 18 countries affects the self–employment decision, as well as the preferences of latent entrepreneurs—individuals who prefer to be self–employed. Latent entrepreneurs fall into two groups, those who are currently self–employed and those who are not—the “truly latent entrepreneurs.” These two groups differ in their responses to changes in the institutional environment. An occupational choice model where institutions affect switching costs informs the empirical model. As institutions such as economic freedom improve, preferences for self–employment increase for both groups, but the effect is greater for those who are currently self–employed.