Productivity, institutions, and market beliefs: three entrepreneurial interpretations

Inspired by the debates among economists about the role of beliefs and informal institutions in economic development, the purpose of this paper is to derive and test different hypotheses about the ways beliefs about the market economy, institutions and policies, and productive entrepreneurship are intertwined.

The paper derives from the literature three hypotheses unified around the idea of (political, cultural, and market) entrepreneurship. The paper then tests these hypotheses by running various country-level regressions intended to check the relationships between formal institutions and policies (measured by World Governance Indicators and by the Economic Freedom of the World index), productive entrepreneurship (measured by total factor productivity form the Penn World Table), and different kinds of market beliefs from the World Values Survey (WVS).

The sociological hypothesis says that more pro-market beliefs provide incentives for innovation by recognizing entrepreneurship as a dignifying activity. The political hypothesis says that people with more pro-market beliefs will demand, and therefore live with, more pro-market institutions and policies. The “Schumpeterian” hypothesis says that it is market institutions that make it possible for entrepreneurs to run against anti-market beliefs, and innovate. The results support the Schumpeterian hypothesis, mainly because market beliefs predict institutions and policies as well as productivity very poorly, while formal institutions and policies make a much better job of this.

The paper contrasts three different hypotheses concerned with the broader consequences of political, cultural, and market entrepreneurship and tests them by making use of the time structure of the observations found in the WVS.