This paper investigates causalities between small businesses and the shadow economy in ten New Member States of the European Union in the years 2000–2005. The transition from a centrally planned to a market economy, with deregulation and privatization of economic activities, has yielded new opportunities for small businesses, new entrepreneurial ideas, and new income sources in these countries. Yet, rigid legislation, high tax wedges, and transaction costs of government institutions have increased the incentives for people to take their work into the shadow economy. To account for the simultaneity and latent variable effects we apply the instrumental variables econometric approach to study the association between small business and the shadow economy. We find that these variables are (weakly) negatively correlated, implying that the macroeconomic environment and institutional framework have improved, encouraging entrepreneurial activities while somewhat impeding the further development of the shadow economy.
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Volume (Year): 58 (2008) Issue (Month): 01-02 (January) Pages: 68-81 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
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Djankov, Simeon & La Porta, Rafael & López-de-Silanes, Florencio & Shleifer, Andrei, 2001.
"The Regulation of Entry,"
CEPR Discussion Papers
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Simeon Djankov & Rafael La Porta & Florencio LopezdeSilanes & Andrei Shleifer, 2000.
"The Regulation of Entry,"
NBER Working Papers
7892, National Bureau of Economic Research, Inc.
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Djankov, Simeon & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001.
"The Regulation of Entry,"
Working Paper Series
rwp01-015, Harvard University, John F. Kennedy School of Government.
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Jay Pil Choi & Marcel Thum, 2005.
"Corruption And The Shadow Economy,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 817-836, 08.
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