The Paradox of Institutional Trust and Entrepreneurship in Transitional Countries

The relationship between institutional trust and entrepreneurship is not straightforward but is intertwined with social context. This study explores this relationship by estimating the relationship between entrepreneurship and institutional trust together with a set of individual social demographics and the country of residence in 27 transitional countries in Eastern Europe and countries of the former Soviet Union using the data of the 2016 Life in Transition Survey (LiTS). The analytical framework in this study is that individuals make their decisions in choosing the type of employment by weighing the level of institutional trust in their communities, a set of democratic factors and social indicators. The results of our 2SLS estimations indicate a consistent negative association between institutional trust and entrepreneurship for all the sub-datasets. However, this cannot be interpreted as evidence for the negative effect of institutional trust on entrepreneurship. Given our analytical framework, this counter common-sense phenomenon would be interpreted as when the institutional trust was high, individuals would rather choose to have a paid job instead of running their own business in these transitional countries. This study provides evidence of how far these countries have gone on the path of transition three decades after the transition.