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While the impact of institutional quality on formal entrepreneurial activity has been well documented in the literature, whether and to what extent corruption influences entrepreneurship in the informal sector is less forthcoming. In this article, we analyze the effect of corruption on entrepreneurship in the formal and informal sectors. Using unique cross‐country data on formal and informal entrepreneurship, we find that corruption deters entrepreneurship in the formal sector and promotes informal entrepreneurship. These results remain robust even after conducting a series of sensitivity analyses.
