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The devil is in the shadow: do institutions affect income and productivity or only official income and official income and official productivity?

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  • Axel Dreher
  • Pierre-Guillaume Méon
  • Friedrich Schneider

Abstract

This paper assesses the relationship between institutions, output, and productivity, when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total (“corrected”) factor productivity even becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series DULBEA Working Papers with number 07-22.RS.

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Length: 46 p.
Date of creation: Nov 2007
Date of revision:
Publication status: Published by: DULBEA - Université libre de Bruxelles, Bruxelles
Handle: RePEc:dul:wpaper:07-22rs

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Keywords: shadow economy; income; aggregate productivity; development accounting;

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Cited by:
  1. Libman, A., 2010. "Empirical Research on Determinants of Decentralization: A Literature Survey," Journal of the New Economic Association, New Economic Association, New Economic Association, issue 6, pages 10-29.

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