IDEAS home Printed from https://ideas.repec.org/a/pal/palcom/v12y2025i1d10.1057_s41599-024-04347-w.html
   My bibliography  Save this article

Do financial development and institutional quality impede or stimulate the shadow economy? A comparative analysis of developed and developing countries

Author

Listed:
  • Waqar Ameer

    (Shandong Technology and Business University)

  • Kazi Sohag

    (Ural Federal University)

  • Qilin Zhan

    (Liaoning University)

  • Syed Hasanat Shah

    (School of Economics Jilin University China and Sino-Japanese Joint Center of Economic Research Jilin University)

  • Zhang Yongjia

    (University of Malaya)

Abstract

Financial development (FD) and institutional quality (IQ) shape the invisible informal economies. This study conducts an empirical analysis of how financial development (FD) and institutional quality (IQ) impact the hidden shadow economy, with a particular focus on the differences between developed and developing countries. Using the CS-ARDL estimation technique, the findings reveal that FD and improved IQ significantly reduce the shadow economy in developing countries while these factors fuel the growth of the underground economy in developed nations. The study also illustrates that in developing nations, a synergy between economic growth, enhanced IQ, and advanced FD effectively contributes to shrinking the shadow economy. These empirical insights offer valuable policy implications, suggesting that adaptive strategies considering the stage of financial development and institutional quality can effectively mitigate the impact of the shadow economy.

Suggested Citation

  • Waqar Ameer & Kazi Sohag & Qilin Zhan & Syed Hasanat Shah & Zhang Yongjia, 2025. "Do financial development and institutional quality impede or stimulate the shadow economy? A comparative analysis of developed and developing countries," Palgrave Communications, Palgrave Macmillan, vol. 12(1), pages 1-11, December.
    • Handle: RePEc:pal:palcom:v:12:y:2025:i:1:d:10.1057_s41599-024-04347-w
    DOI: 10.1057/s41599-024-04347-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41599-024-04347-w
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s41599-024-04347-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Adam, M. C. & Ginsburgh, V., 1985. "The effects of irregular markets on macroeconomic policy : Some estimates for belgium," European Economic Review, Elsevier, vol. 29(1), pages 15-33.
    2. Eric Friedman & Simon Johnson & Daniel Kaufmann & Pablo Zoido-Lobaton, 2007. "Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries," Palgrave Macmillan Books, in: Erik Berglöf & Gérard Roland (ed.), The Economics of Transition, chapter 9, pages 298-334, Palgrave Macmillan.
    3. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.
    4. Schneider Friedrich, 2010. "The Influence of Public Institutions on the Shadow Economy: An Empirical Investigation for OECD Countries," Review of Law & Economics, De Gruyter, vol. 6(3), pages 441-468, December.
    5. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 109-149, May.
    6. Douglas Hibbs & Violeta Piculescu, 2005. "Institutions, Corruption and Tax Evasion in the Unofficial Economy," Public Economics 0508003, University Library of Munich, Germany.
    7. Leandro Medina & Mr. Friedrich Schneider, 2018. "Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?," IMF Working Papers 2018/017, International Monetary Fund.
    8. Torgler, Benno & Schneider, Friedrich, 2007. "Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis," Berkeley Olin Program in Law & Economics, Working Paper Series qt26s710z8, Berkeley Olin Program in Law & Economics.
    9. Christian Daude & Ernesto Stein, 2007. "The Quality Of Institutions And Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 19(3), pages 317-344, November.
    10. Axel Dreher & Friedrich Schneider, 2010. "Corruption and the shadow economy: an empirical analysis," Public Choice, Springer, vol. 144(1), pages 215-238, July.
    11. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2009. "How do institutions affect corruption and the shadow economy?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 773-796, December.
    12. Ceyhun Elgin & Burak Uras, 2013. "Is informality a barrier to financial development?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 309-331, August.
    13. Torgler, Benno & Schneider, Friedrich, 2009. "The impact of tax morale and institutional quality on the shadow economy," Journal of Economic Psychology, Elsevier, vol. 30(2), pages 228-245, April.
    14. Berdiev, Aziz N. & Saunoris, James W., 2016. "Financial development and the shadow economy: A panel VAR analysis," Economic Modelling, Elsevier, vol. 57(C), pages 197-207.
    15. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
    16. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    17. Jiang, Ting & Nie, Huihua, 2014. "The stained China miracle: Corruption, regulation, and firm performance," Economics Letters, Elsevier, vol. 123(3), pages 366-369.
    18. L. Vanessa Smith & Stephen Leybourne & Tae-Hwan Kim & Paul Newbold, 2004. "More powerful panel data unit root tests with an application to mean reversion in real exchange rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 147-170.
    19. Désirée Teobaldelli & Friedrich Schneider, 2013. "The influence of direct democracy on the shadow economy," Public Choice, Springer, vol. 157(3), pages 543-567, December.
    20. Gökçer Özgür & Ceyhun Elgin & Adem Y. Elveren, 2021. "Is informality a barrier to sustainable development?," Sustainable Development, John Wiley & Sons, Ltd., vol. 29(1), pages 45-65, January.
    21. Benno Torgler & Friedrich Schneider & Christoph Schaltegger, 2010. "Local autonomy, tax morale, and the shadow economy," Public Choice, Springer, vol. 144(1), pages 293-321, July.
    22. Pesaran, M. Hashem & Tosetti, Elisa, 2011. "Large panels with common factors and spatial correlation," Journal of Econometrics, Elsevier, vol. 161(2), pages 182-202, April.
    23. repec:bla:germec:v:11:y:2010:i::p:109-149 is not listed on IDEAS
    24. Quintano, Claudio & Mazzocchi, Paolo, 2013. "The shadow economy beyond European public governance," Economic Systems, Elsevier, vol. 37(4), pages 650-670.
    25. Niloy Bose & Salvatore Capasso & Martin Andreas Wurm, 2012. "The impact of banking development on the size of shadow economies," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(6), pages 620-638, October.
    26. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    27. Zoë Kuehn, 2014. "Tax Rates, Governance, And The Informal Economy In High-Income Countries," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 405-430, January.
    28. Blackburn, Keith & Bose, Niloy & Capasso, Salvatore, 2012. "Tax evasion, the underground economy and financial development," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 243-253.
    29. Sadorsky, Perry, 2013. "Do urbanization and industrialization affect energy intensity in developing countries?," Energy Economics, Elsevier, vol. 37(C), pages 52-59.
    30. Dominik Enste, 2010. "Regulation and shadow economy: empirical evidence for 25 OECD-countries," Constitutional Political Economy, Springer, vol. 21(3), pages 231-248, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wenjing Yu & Qilin Zhan & Waqar Ameer & Xiaohui Zeng, 2025. "Impact of transaction-oriented financial assets on firm innovation in China: effects of liquid reserve and risk mitigation," Palgrave Communications, Palgrave Macmillan, vol. 12(1), pages 1-14, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aziz N. Berdiev & James W. Saunoris & Friedrich Schneider, 2018. "Give Me Liberty, or I Will Produce Underground: Effects of Economic Freedom on the Shadow Economy," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 537-562, October.
    2. KOUAKOU, Dorgyles C.M. & YEO, Kolotioloma I.H., 2023. "Can innovation reduce the size of the informal economy? Econometric evidence from 138 countries," MPRA Paper 119264, University Library of Munich, Germany.
    3. Luc Jacolin & Joseph Keneck Massil & Alphonse Noah, 2021. "Informal sector and mobile financial services in emerging and developing countries: Does financial innovation matter?," The World Economy, Wiley Blackwell, vol. 44(9), pages 2703-2737, September.
    4. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    5. Nedra Baklouti & Younes Boujelbene, 2020. "A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?," Economic Change and Restructuring, Springer, vol. 53(1), pages 151-170, February.
    6. Aziz N. Berdiev & James W. Saunoris & Friedrich Schneider, 2020. "Poverty and the shadow economy: The role of governmental institutions," The World Economy, Wiley Blackwell, vol. 43(4), pages 921-947, April.
    7. Elbahnasawy, Nasr G., 2021. "Can e-government limit the scope of the informal economy?," World Development, Elsevier, vol. 139(C).
    8. Canh, Nguyen Phuc & Thanh, Su Dinh, 2020. "Financial development and the shadow economy: A multi-dimensional analysis," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 37-54.
    9. Boyer, Marcel & El Moussaoui, Hicham & Petkantchin, Valentin, 2024. "Le microentrepreneuriat et l'accès à l'eau potable dans les quartiers précaires d'Abidjan (Côte d'Ivoire)," TSE Working Papers 24-1584, Toulouse School of Economics (TSE).
    10. Sahnoun, Marwa & Abdennadher, Chokri, 2019. "The nexus between unemployment rate and shadow economy: A comparative analysis of developed and developing countries using a simultaneous-equation model," Economics Discussion Papers 2019-30, Kiel Institute for the World Economy (IfW Kiel).
    11. Colin C. Williams & Friedrich Schneider, 2016. "Measuring the Global Shadow Economy," Books, Edward Elgar Publishing, number 16551.
    12. Yilmaz Bayar & Omer Faruk Ozturk, 2016. "Financial Development and Shadow Economy in European Union Transition Economies," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 14(2 (Summer), pages 157-173.
    13. Elena D’Agostino & Marco Alberto De Benedetto & Giuseppe Sobbrio, 2023. "Does the economic freedom hinder the underground economy? Evidence from a cross-country analysis," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(1), pages 319-341, April.
    14. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    15. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.
    16. Sami Ur Rahman & Faisal Faisal & Adnan Ali, 2023. "Financial Development and Shadow Economy: A Bibliometric Analysis Using the Scopus Database (1985–2021)," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(3), pages 2238-2265, September.
    17. Barra, Cristian & Papaccio, Anna & Ruggiero, Nazzareno, 2024. "Bank cost efficiency and underground economy: The asymmetric impact of cooperative and non-cooperative banks," The Journal of Economic Asymmetries, Elsevier, vol. 30(C).
    18. Allam, Amir & Abou-El-Sood, Heba & Elmarzouky, Mahmoud & Yamen, Ahmed, 2024. "Financial development and tax evasion: International evidence from OECD and non-OECD countries," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 57(C).
    19. Marã­A Paula Vargas & Erick Lahura, 2022. "Financial Development, Financial Inclusion And Informality: New International Evidence," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-42, September.
    20. Luc Jacolin & Massil Keneck & Alphonse Noah, 2019. "Informal Sector and Mobile Financial Services in Developing Countries: Does Financial Innovation Matter?," Working papers 721, Banque de France.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:palcom:v:12:y:2025:i:1:d:10.1057_s41599-024-04347-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: https://www.nature.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.