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Individualism, economic freedom, and the development of the shadow economy

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  • Saunoris, James W.

Abstract

To better understand the relationship between formal institutions, culture, and the size of the shadow economy, this paper considers the impact of pro-market institutions and cultures of individualism, and their interplay, on the size of the shadow economy. Using panel data for 64 countries from 1995 to 2017, the results show that economically free countries that value individualism over collectivism are, on average, associated with smaller shadow economies. Furthermore, the findings reveal that individualistic cultures amplify the effect of formal market-supporting institutions in reducing the size of the shadow economy, and vice versa. In terms of policy guidance, the results of this study suggest that policies would benefit from accounting for culture in promoting pro-market institutions to combat the shadow economy or in transitioning shadow participants to the formal sector.

Suggested Citation

  • Saunoris, James W., 2024. "Individualism, economic freedom, and the development of the shadow economy," Economic Systems, Elsevier, vol. 48(1).
    • Handle: RePEc:eee:ecosys:v:48:y:2024:i:1:s0939362523001073
    DOI: 10.1016/j.ecosys.2023.101168
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    More about this item

    Keywords

    Shadow economy; Individualism; Economic freedom; Institutions; Culture; Informal institutions;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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