DETERMINANTS OF THE SHADOW ECONOMY. A CROSS-COUNTRY SURVEY ON THE WORLDWIDE COUNTRIES

Abstract

Purpose: In this paper, we analyze the main determinants of shadow economy and the correlations between them.

Theoretical framework: This paper focuses both on the theoretical and practical aspects regarding the causes of shadow economy and on the policy measures in tackling and investigating these kinds of activities. It is important to know the factors influencing the shadow economy, mainly because they can deliver information concerning the measures policymakers can take to reduce or even tackle the phenomenon.

Design/methodology/approach: For the purpose of our study we used a sample of 135 countries worldwide (from which 44 are developed, while 91 are developing) over cross-sectional data 2018-2020 (depending on availability). As methodology, correlation coefficients, simple and multiply regression are conducted. Then the visual presentation of the correlation between variables is realized with maps created in Tableau software.

Findings: Our results show that GDP per capita, Houman Development Index, tax revenue, Rule of Law, Government efficiency, and Regulation Quality correlate negatively with the shadow economy, while corruption and income inequality correlates positively with the phenomenon studied. However, the results show that Rule of Law and GDP per capita are found to be the main determinants for the slide in the shadow economy

Research, Practical & Social Implications: Knowing the determining factors of shadow economy is of a high importance for the policymakers in order to adopt proper decision to reduce the size of shadow economy.

Originality/value: The originality of this work results in finding clear evidence that among potential determinants on shadow economy, Rule of Law and GDP per capita are found to be the most important ones. This two factors are responsible for about 56% of the shadow economy size. The adopted policies to reduce shadow economy need to be focused on improving two major fields.

Index Terms—shadow economy, determinants.