Previous research has shown that micro and small entrepreneurs in poor countries achieve relatively high marginal returns to capital but show very low reinvestment rates. We investigate whether informal taxation motivated by risk sharing and forced redistribution is an important deterrent to economic growth and development. The key idea is that the more redistribution violates actuarial fairness of the insurance, the more potentially successful entrepreneurs may be hindered to undertake profitable investments. Our empirical analysis is guided by a theoretical model in which entrepreneurs have to decide whether they want to invest and rely on themselves or whether they share their income with their family and kin, hence forgo investment opportunities, but are insured against shocks. The empirical results based on a sample of small entrepreneurs support the main propositions of the model. Two distinct groups can be identified operating either under insurance or a growth regime. The findings highlight that informal sharing often has two functions, insurance and redistribution, and that the latter may imply inefficiencies that hold back enterprise growth. The results can provide a basis for formal risk management policies, such as public health insurance.