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The Shadow Economy in International Comparison: Options for Economic Policy Derived from an OECD Panel Analysis

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  • Ulrich Thiessen

Abstract

Building on new behavioral theories, using a data set of about 450 variables and augmenting the Sala-i-Martin definition of robustness, we find evidence in support of the hypothesis that the standard causes of the shadow economy (SE), taxes, the administrative burden and labor market regulations, are not per se crucial in determining the size of the SE. Many of the robust influences emanate from relatively new theories such as elements of direct democracy, social interaction effects, and happiness, and from the institutional literature on the relative importance of specific institutions for economic performance. Most of them can well be affected by governments. Hence, if one believes the SE to be a problem in high income industrial countries, governments could address it through many ways, including their own behavior. And these could be more successful than a strategy built on more government control, increased punishment and less freedom, as adopted by some OECD countries. Simulations of the size of the SE demonstrate their sensitivity to the required velocity assumption and show that previous estimates, including those of the so-called Mimic model, appear to be based on very high velocity assumptions. A moderate velocity assumption yields macro estimates of the SE consistent with the micro evidence, i.e. not more than a few percent of official GDP. Finally, for the first time, we separate the relatively large 'crime-related' shadow activity from the 'non-criminal' one.

Suggested Citation

  • Ulrich Thiessen, 2010. "The Shadow Economy in International Comparison: Options for Economic Policy Derived from an OECD Panel Analysis," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 481-509.
  • Handle: RePEc:taf:intecj:v:24:y:2010:i:4:p:481-509
    DOI: 10.1080/10168737.2010.525986
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    References listed on IDEAS

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    1. Oguzhan Dincer & Eric Uslaner, 2010. "Trust and growth," Public Choice, Springer, vol. 142(1), pages 59-67, January.
    2. Seitz, Franz & Fischer, Björn & Köhler, Petra, 2004. "The demand for euro area currencies: past, present and future," Working Paper Series 330, European Central Bank.
    3. Jean-Robert Tyran & Lars P. Feld, 2006. "Achieving Compliance when Legal Sanctions are Non-deterrent," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 135-156, March.
    4. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "Democracy, Governance, and Economic Growth: Theory and Evidence," World Scientific Book Chapters,in: International Trade, Capital Flows and Economic Development, chapter 8, pages 215-248 World Scientific Publishing Co. Pte. Ltd..
    5. Thiessen, Ulrich, 2003. "The Impact of Fiscal Policy and Deregulation on Shadow Economies in Transition Countries: The Case of Ukraine," Public Choice, Springer, vol. 114(3-4), pages 295-318, March.
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    Citations

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    Cited by:

    1. Nikolaus Bartzsch & Gerhard Rösl & Franz Seitz, 2012. "A simple way to capture currency abroad," Applied Economics Letters, Taylor & Francis Journals, vol. 19(15), pages 1511-1514, October.
    2. Bartzsch, Nikolaus & Rösl, Gerhard & Seitz, Franz, 2013. "Currency movements within and outside a currency union: The case of Germany and the euro area," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 393-401.
    3. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.
    4. de Koker, Louis & Jentzsch, Nicola, 2013. "Financial Inclusion and Financial Integrity: Aligned Incentives?," World Development, Elsevier, vol. 44(C), pages 267-280.
    5. Goel, Rajeev K. & Nelson, Michael A., 2016. "Shining a light on the shadows: Identifying robust determinants of the shadow economy," Economic Modelling, Elsevier, vol. 58(C), pages 351-364.
    6. Yilmaz BAYAR, 2016. "Public governance and shadow economy in Central and Eastern European countries," REVISTA ADMINISTRATIE SI MANAGEMENT PUBLIC, Faculty of Administration and Public Management, Academy of Economic Studies, Bucharest, Romania, vol. 2016(27), pages 62-73, Decembre.
    7. Konstantin A. Kholodilin & Ulrich Thießen, 2011. "The Shadow Economy in OECD Countries: Panel-Data Evidence," Discussion Papers of DIW Berlin 1122, DIW Berlin, German Institute for Economic Research.
    8. Piotr Dybka & Michal Kowalczuk & Bartosz Olesinski & Marek Rozkrut & Andrzej Toroj, 2017. "Currency demandand MIMIC models: towards a structured hybrid model-based estimation of the shadow economy size," Working Papers 2017-030, Warsaw School of Economics, Collegium of Economic Analysis.
    9. Marcus Ruge, 2010. "Determinants and Size of the Shadow Economy - A Structural Equation Model," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 511-523.

    More about this item

    Keywords

    Shadow economy; currency and mimic method; policy response;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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