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

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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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0768.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0768.

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Length: 24
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:cam:camdae:0768
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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