(Self-)Employment and Weak Institutions


Many low-income countries suffer from limited contract enforcement and an ensuing low-trust environment. This can create labor market frictions by establishing mistrust between employers and employees. While consequences for firms have been well established, this paper illuminates the consequences for the labor supply side. Drawing on original data from Nigeria, this paper shows that workers are concerned about an employer not honoring the work agreement and paying wage as agreed. This concern directly affects peoples’ preferences and seems to make self-employment more attractive. Quantifying the degree of uncertainty with a choice experiment, this paper finds that workers value a very high degree of certainty about correct wage payment equivalent to a 16.8% salary increase. Hence, this paper suggests that the inherently uncertain environment of low-income countries can have direct implications for workers and their choices when seeking employment.