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Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006

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Author Info

  • James Alm

    ()
    (Department of Economics, Tulane University)

  • Abel Embaye

    ()
    (Department of Economics, University of Arkansas)

Abstract

The paper estimates the size of shadow economy for 111 countries for the years 1984 to 2006 based on the currency demand approach. An important innovation is our use of dynamic panel data methods, which allows us to make several important contributions. First, we estimate the shadow economy for a range of heterogeneous countries that previously could not be included in the same regression. Second, we include variables that measure institutional quality in countries, including a variable that measures enforcement efforts. Third, we account for the persistence of currency demand as it evolves over time. Our results indicate a substantial shadow economy across countries, ranging from 10 to 86 percent of GDP, with some tendency to grow over time. We also find that the shadow economy varies significantly by country income group. The mean shadow economy is 17 percent of GDP for OECD countries, 24 percent for non-OECD high income countries, 33 percent for upper middle income countries, 37 percent for lower middle income countries, and 38 percent for low income countries.

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File URL: http://econ.tulane.edu/RePEc/pdf/tul1303.pdf
File Function: First Version, February 2013
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Bibliographic Info

Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1303.

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Length: 41 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:tul:wpaper:1303

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Related research

Keywords: tax evasion; shadow economy; currency demand method; panel data;

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References

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  1. Shima, Isilda, 2004. "The shadow economy in Norway: Demand for currency approach," Memorandum 10/2004, Oslo University, Department of Economics.
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Cited by:
  1. James Alm, 2012. "Measuring, Explaining, and Controlling Tax Evasion: Lessons from Theory, Experiments, and Field Studies," Working Papers 1213, Tulane University, Department of Economics.

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