Recently, a professor at a business school allegedly abused his faculty position to provide fake certificates to students he had forced to attend an online course he taught. He essentially took advantage of India’s growing pre-pandemic gig economy in education. When the facility’s authorities discovered the bat, they suspended him. This is a cautionary story for the rise of shadow entrepreneurship around the world, not just in education but in other sectors such as finance (for easy loans), betting (online gaming) and healthcare (e-pharmacies). Given the possible perverse long-term consequences of shadow entrepreneurship for the well-being of consumers, regulation is needed to monitor the quality of services.
Supply and demand shock
What could be driving the rise of shadow entrepreneurship? When there is such a significant supply and demand shock as COVID-19, a new market may open up to handle the inward shift of markets due to rising prices and decreasing quantities available. Shadow entrepreneurs offering the appeal of technology-enabled services can help eliminate the associated distortions and frictions in the market by offering complementary services that traditional service providers may have limited access to or that consumers may not be able to access due to lock restrictions to have. This could lead to a redistribution of old consumers to these new markets provided by technology and the entry of new consumers. While the markets can correct themselves on the principles of the invisible hand, the initial surge in demand and the resulting lock-in effects could mean greater market power for early movers.
The manifestation of such market power will come in a number of ways beyond the obvious effects of pricing. Small firms are taken over by large firms. First movers in space with deep pockets could generate irrationally high ratings. This can also affect cross-border and national security, as it was recently reported that shady loans from Chinese instant loan providers are being provided online. Such technology-mediated corporate shadow platforms could also accommodate less than secure rooms, as is the case with harassment on Indian telemedicine platforms.
It also means that unscrupulous individuals who are not entrepreneurs in themselves but are complementary service providers may make greater use of these market restrictions after the pandemic and deprive consumers of money by forging documents. While such shadow entrepreneurship can produce short-term welfare effects with technology-mediated access, in the long run it could have perverse welfare effects.
The way forward
How then can such activities be regulated? As research by Amit Seru at Stanford University and his colleagues through studying shadow finance in the US or research by the Indian Institute of Management in Ahmedabad in the world of private coaching houses in Indian education, strict quality monitoring would be essential. This needs to be complemented by punishing violations with a prison sentence, restricting services and resulting severe consequences. Those shadow companies that meet these requirements are cordially invited to join the predominant mode of service provision with non-shadow companies. In the absence of regulation, however, the situation could spiral out of control in the face of the need to monitor the distribution of public goods for developing countries. There must also be a related harmonization of activities between the competition authorities of the governments (in the case of India the Department of Corporate Affairs in the regulation of shadow entrepreneurship and government departments in the areas of health, education or finance).
The big question, however, is whether governments around the world will pay attention given the stress and fatigue of trying to deal with the virus. If not, with shadow entrepreneurship growing around the world, we may face the adverse welfare consequences of COVID-19 that do not come from COVID-19.
Chirantan Chatterjee is a faculty member at IIM Ahmedabad and a visiting fellow at the Hoover Institution at Stanford University
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