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Nonlinearity between the Shadow Economy and Level of Development

Author

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  • Wu, Dong Frank

    () (International Monetary Fund)

  • Schneider, Friedrich

    () (University of Linz)

Abstract

This paper is the first attempt to directly explore the long-run nonlinearity of the shadow economy. Using a dataset of 158 countries over the period from 1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size and GDP per capita. Our results imply that the shadow economy tends to increase when economic development surpasses a given threshold or at least does not disappear with economic growth. Our findings suggest that special attention should be given to the country's level of development when designing policies to tackle issues related to the shadow economy.

Suggested Citation

  • Wu, Dong Frank & Schneider, Friedrich, 2019. "Nonlinearity between the Shadow Economy and Level of Development," IZA Discussion Papers 12385, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp12385
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    References listed on IDEAS

    as
    1. em. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
    2. Ceyhun Elgin & Ferda Erturk, 2016. "Is Informality a Barrier to Convergence?," Economics Bulletin, AccessEcon, vol. 36(4), pages 2556-2568.
    3. Ceyhun Elgin & Mario-Solis Garcia, 2012. "Public Trust, Taxes and the Informal Sector," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 26(1), pages 27-44.
    4. 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, pages 109-149, May.
    5. Claudia Goldin, 1994. "The U-Shaped Female Labor Force Function in Economic Development and Economic History," NBER Working Papers 4707, National Bureau of Economic Research, Inc.
    6. Ceyhun Elgin & Serdar Birinci, 2016. "Growth and informality: A comprehensive panel data analysis," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 271-292, November.
    7. Elbahnasawy, Nasr G. & Ellis, Michael A. & Adom, Assandé Désiré, 2016. "Political Instability and the Informal Economy," World Development, Elsevier, vol. 85(C), pages 31-42.
    8. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    9. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
    10. Ceyhun Elgin & Oguz Oztunali, 2012. "Shadow Economies around the World: Model Based Estimates," Working Papers 2012/05, Bogazici University, Department of Economics.
    11. Leandro Medina & Friedrich Schneider, 2018. "Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?," IMF Working Papers 18/17, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    shadow economy; level of development; nonlinearity; GDP per capita;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • 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
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • I25 - Health, Education, and Welfare - - Education - - - Education and Economic Development

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