Cross-country differences in self-employment rates: the role of institutions

Abstract

This paper examines the role of institutional variables in determining the large disparities observed in self-employment rates across OECD countries. We develop a simple model analysing the role of taxation and tax evasion opportunities. This model predicts tax evasion opportunities to have an unambiguous positive impact on self-employment, while taxation can either spur or reduce the self-employment rate depending on the country attitude towards tax evasion. We find empirical support for the model predictions using a panel of OECD countries. We also show that the selfemployment rate depends negatively on the share of workers in the public sector, while we do not find any robust relationship with employment protection legislation. We find a positive correlation with product market regulation and a negative one with the unemployment benefit replacement rate, but their relevance is sensitive to model specification.