Rise of Shadow Entrepreneurship

Context: Given the potentially perverse consequences of shadow entrepreneurship in the long run for consumer welfare, regulation is needed to monitor the quality of services.

Background: There has been a global rise of shadow entrepreneurship in sectors like education (private coaching), finance (for easy loans), the betting economy (online games) and healthcare (e-pharmacies).

• Definition: Shadow entrepreneurs manage a business that sells legitimate goods and services but does not register their businesses.
• Features: They do not pay tax, operating in a shadow economy where business activities are performed outside the reach of government authorities.
• Reason for the rise: Due to supply-demand shock amidst pandemic, they have replaced traditional services by offering technology-mediated service, leading to the redistribution of old consumers and benefiting from new consumers.

Associated concerns with shadow entrepreneurship:

• Higher market power for early movers: due to the initial spike in demand and ensuing lock-in effects, resulting in price-setting effects and acquisition of small firms by large firms.
• Cross-border and national security implications: E.g. shady loans being provided by Chinese instant loan providers online.
• Could lead to harassment: as is happening with harassment in Indian telemedicine platforms.
  • Complimentary service providers extract money from consumers by taking advantage of post-pandemic market constraints.

Way Forward:

• Strong monitoring of quality: complimented with non-compliance being punishable with a jail term, clamping down on services and related strict consequences.
• Harmonization between authorities of governments: In India’s case, the Ministry of Corporate Affairs in regulating shadow entrepreneurship and government departments in healthcare, education or finance.