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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.

Suggested Citation

  • Bojan Nastav & Štefan Bojnec, 2008. "Small Businesses and the Shadow Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(01-02), pages 68-81, January.
    • Handle: RePEc:fau:fauart:v:58:y:2008:i:1-2:p:68-81
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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.
    2. Jarle Aarstad, 2012. "Do Structural Holes and Network Connectivity Really Affect Entrepreneurial Performance?," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 21(2), pages 253-268, September.
    3. Merike Kukk & Karsten Staehr, 2014. "Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income?," TUT Economic Research Series 8, Department of Finance and Economics, Tallinn University of Technology.

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    More about this item

    Keywords

    small business; self-employment; shadow economy;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - 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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