Abstract/Summary

Informal investors' decisions are embedded in and influence by the institutional environment. This paper advanced a multilevel model on how institutional factors moderate the decision of informal investors. It is postulated that formal institutional factors (rule of law, regulation quality) and informal ones (social trust, institutional uncertainty tolerance) can enhance information flow, collaboration, and sanctioning mechanisms in a society; as a result, they moderate the importance of decision factors of informal investors. Multilevel modeling on data from 27 countries (over 90,000 people) shows that the institutional factors heighten the positive relationship between individual's having start-up skills and informal investment, but surprisingly dampen that between seeing opportunity in new business and informal investment. These moderating effects are robust even after wealth, cultural values, and other factors are controlled. This study contributes to the research interaction of entrepreneurship and institutional theory. It also sheds light on the differential effects of improved institutions on informal investment. Different from most people would believe, improved institutions could actually cast adverse effects on informal investment, as smart, opportunity-driven individuals can have many other choices to put their investment.