Recently, a professor at a business school allegedly misused his faculty position to provide fake certificates to students whom he had compelled to attend an online course that he taught. He essentially took advantage of India’s rising pre-pandemic gig economy in education. When authorities at the institution discovered the racket, they suspended him. This is a cautionary tale for the global rise of shadow entrepreneurship, not just in education but other sectors such as finance (for easy loans), the betting economy (online games) and healthcare (e-pharmacies). Given the potential perverse consequences of shadow entrepreneurship in the long run for consumer welfare, regulation is needed to monitor quality of services.
Supply and demand shock
What might drive the rise of shadow entrepreneurship? When there is a supply and demand shock as momentous as COVID-19, a new market may open up to tackle the shifting inwards of markets, owing to rising prices and lower quantities available. Shadow entrepreneurs, offering the allure of technology-mediated services, can help release the associated distortions and frictions in the market by offering complementary services that traditional service providers may be constrained to offer or consumers might not be able to access due to lockdown constraints. This could produce a redistribution of old consumers towards these new markets provided through technology and also entry of new consumers. While markets may self-correct using the invisible hand principles, the initial spike in demand and ensuing lock-in effects might imply higher market power for early movers.
The manifestation of such market power will happen through a variety of ways beyond the obvious price setting effects. Small firms will get acquired by large firms. First movers in the space with deep pockets could generate irrationally high valuations. This may also show up with cross-border and national security implications as recently reported about shady loans being provided by Chinese instant loan providers online. Such technology-mediated shadow entrepreneurial platforms could also harbour less than safe spaces as is happening with harassment in Indian telemedicine platforms.
It will also mean that unscrupulous individuals who are not entrepreneurs per se but are complementary service providers will potentially take more advantage of these post-pandemic market constraints, extracting money from consumers by means such as document forgery. Clearly, while such shadow entrepreneurialism may spike short-run welfare effects with technology mediated access, they could create perverse welfare consequences in the long run.
The way forward
What is then the way forward to regulate such activity? As research by Amit Seru at Stanford University and his colleagues found through studying shadow finance in the U.S., or research by the Indian Institute of Management, Ahmedabad found in the world of private coaching houses in Indian education, strong monitoring of quality would be essential. This needs to be complemented with non-compliance being punishable with a jail term, clamping down on services and related strict consequences. Those shadow firms that comply are more than welcome to join the dominant mode of service delivery with non-shadow firms. But without regulation, the situation could spiral out of control, given monitoring needs of public goods distribution for the developing world. There also needs to be an associated harmonisation of activities between competition authorities of governments (in India’s case the Ministry of Corporate Affairs in regulating shadow entrepreneurship and government departments in healthcare, education or finance).
The big question though is, caught in the stress and fatigue of trying to manage the virus, will governments worldwide pay attention? If not, we may be in for the non-COVID-19 adverse welfare consequences of COVID-19, given the rise in shadow entrepreneurship around the world.
Chirantan Chatterjee is a faculty member at IIM Ahmedabad and Visiting Fellow at Hoover Institution, Stanford University