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Small Businesses and the Shadow Economy

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    Abstract

    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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    File URL: http://journal.fsv.cuni.cz/storage/1106_str_68_81_-_nastav-bojnec.pdf
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    Bibliographic Info

    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 58 (2008)
    Issue (Month): 01-02 (January)
    Pages: 68-81

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    Handle: RePEc:fau:fauart:v:58:y:2008:i:1-2:p:68-81

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    Keywords: small business; self-employment; shadow economy;

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    1. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," IZA Discussion Papers 1374, Institute for the Study of Labor (IZA).
    2. Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei & Lopez de Silanes, Florencio, 2001. "The regulation of entry," Policy Research Working Paper Series 2661, The World Bank.
    3. Ertugrul Deliktas & Mehmet Balcilar, 2005. "A Comparative Analysis of Productivity Growth, Catch-Up, and Convergence in Transition Economies," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 41(1), pages 6-28, January.
    4. Jay Pil Choi & Marcel Thum, 2002. "Corruption and the Shadow Economy," CESifo Working Paper Series 633, CESifo Group Munich.
    5. Roy Thurik & Isabel Grilo, 2006. "Entrepreneurship in the old en new Europe," Scales Research Reports N200516, EIM Business and Policy Research.
    6. Ruta Aidis, 2003. "Entrepreneurship and Economic Transition," Tinbergen Institute Discussion Papers 03-015/2, Tinbergen Institute.
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    Cited by:
    1. Jože Kocjancic & Stefan Bojnec, 2011. "Analisys of the Shadow Economy in the Wood Industry," MIC 2011: Managing Sustainability? Proceedings of the 12th International Conference, Portorož, 23–26 November 2011 [Selected Papers], University of Primorska, Faculty of Management Koper.

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