Entrepreneurship, Tax Evasion and Corruption in Europe

This paper investigates the long-run relationship between the entrepreneurial activity, tax evasion and corruption in 15 European countries. We posit that tax evasion and corruption have a negative influence on entrepreneurship, but some endogeneity issues appear when investigating this relationship. Therefore, we use a panel cointegration analysis and we find that there is a long-run link between our variables, and that tax evasion and corruption negatively affect the total entrepreneurial activity. In addition, this paper shows that the impact is smaller if we consider the necessity-driven entrepreneurs only, due to the fact that this category of entrepreneurs is forced to start a business having no other revenue sources and is less sensitive to institutional weaknesses. More precisely, while corruption still influences the activity of necessity-driven entrepreneurs, no effect is documented in the case of tax evasion. This result proves that necessity-driven entrepreneurs do not carefully take into account the external traits when they start a business. Consequently, if the entrepreneurship is associated with one of the main drivers of economic growth, the authorities shall handle the institutional weaknesses in order to favor the entrepreneurial activity.