Sensation Seeking and Entrepreneurial Behavior in the Formal and Informal Economy

Abstract

Psychological factors associated with formal economy entrepreneurial behavior are central to organizational theory and practice. In terms of the informal economy, sociologists and economists have considered underground entrepreneurial activity; yet relatively little is known from a psychological perspective. For theoretical models of organizational behavior and entrepreneurship, the relative paucity raises the fundamental question whether (or what) current literature generalizes to informal economy activity? For policy, it begs the question of, what psychological factors predict informal activity, such that illegal entrepreneurial propensity might be channeled toward productive formal economy work (e.g. toward innovation or legal entrepreneurship)? This paper contributes by starting with the narrower question of: when not out of necessity, what psychological factors are associated with selectively engaging in informal economy entrepreneurial activity? Based on existing literature, we propose sensation seeking (SS). After controlling for demographic and other psychological factors, results of an empirical study: 1) replicate past research finding SS positively associated with formal entrepreneurial activity; 2) find SS highly predictive of informal entrepreneurial activity; and 3) find that SS is a materially stronger predictor of informal activity. Results are robust to different operationalizations, and show highly significant ÷²s and odds ratios of 11:1 and larger. Overall, the study supports the importance of further research bridging the gap at the individual level between existing knowledge and underground entrepreneurial behavior largely missed by academia. Additionally, it provides evidence of a strong connection between SS and organizational behavior. The results can contribute back to the psychological literature by suggesting a potentially productive side to a largely questionable characteristic and cognitive style, and to general management and entrepreneurship literature by better understanding theoretical boundary conditions and suggesting SS’s inclusion in relevant models.