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The Influence of Direct Democracy on the Shadow Economy

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  • Désirée Teobaldelli
  • Friedrich Schneider

Abstract

We analyze, both theoretically and empirically, the influence of direct democratic institutions on the size and development of shadow economies. Our model suggests that, as the extent of direct democracy increases, implemented fiscal policies more nearly reflect the preferences of citizens and so reduce their incentives to operate in the informal sector. This theory implies a negative relationship between the extent of direct democracy and the size of the country’s shadow economy. We also theorize that direct democracy has a greater effect in reducing the informal sector when the former is at low or intermediate values and when the electoral system is characterized by a larger district magnitude. An empirical investigation of a sample of 57 democracies confirms our model’s predictions.

Suggested Citation

  • Désirée Teobaldelli & Friedrich Schneider, 2013. "The Influence of Direct Democracy on the Shadow Economy," Economics working papers 2013-16, Department of Economics, Johannes Kepler University Linz, Austria.
  • Handle: RePEc:jku:econwp:2013_16
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    References listed on IDEAS

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    Cited by:

    1. Alexandru Theodoru DRONCA, 2016. "The influence of fiscal freedom, government effectiveness and human development index on tax evasion in the European Union," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 5-18, Winter.
    2. Leandro Medina & Friedrich Schneider, 2017. "Shadow Economies around the World: New Results for 158 Countries over 1991-2015," CESifo Working Paper Series 6430, CESifo Group Munich.
    3. Alexander Libman & Janis N. Kluge, 2017. "Sticks or Carrots? Comparing Effectiveness of Government Shadow Economy Policies in Russia," Working Papers 364, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    4. Bologna, Jamie, 2016. "The effect of informal employment and corruption on income levels in Brazil," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 657-695.
    5. repec:scm:ecofrm:v:5:y:2016:i:2:p:30 is not listed on IDEAS
    6. repec:ces:ifodic:v:14:y:2017:i:4:p:19267788 is not listed on IDEAS
    7. repec:pia:review:v:9:y:2018:i:1:n:2 is not listed on IDEAS
    8. Alexandru Theodoru DRONCA, 2016. "The influence of fiscal freedom, government effectiveness and human development index on tax evasion in the European Union," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 5-18, Winter.
    9. 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.
    10. Ciprian ROTARU & Raluca GEORGESCU & Dumitru-Alexandru BODISLAV, 2017. "The evolution of corruption and its current state – A case study on Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 99-108, Spring.
    11. Friedrich Schneider, 2017. "Estimating the Size of the Shadow Economies of Highly-developed Countries: Selected New Results," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(4), pages 44-53, 02.
    12. repec:eee:reveco:v:55:y:2018:i:c:p:1-20 is not listed on IDEAS
    13. Schneider Friedrich, 2015. "Schwarzarbeit, Steuerhinterziehung und Korruption: Was ökonomische und nicht-ökonomische Faktoren zur Erklärung beitragen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 16(4), pages 412-425, December.
    14. Jamie Bologna, 2014. "The Effect of Informal Employment and Corruption on Income Levels in Brazil," Working Papers 14-26, Department of Economics, West Virginia University.
    15. Ciprian ROTARU & Raluca GEORGESCU & Dumitru-Alexandru BODISLAV, 2017. "The evolution of corruption and its current state – A case study on Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 99-108, Spring.
    16. Hassan, Mai, 2017. "The impact of the shadow economy on aid and economic development nexus in Egypt," MPRA Paper 80990, University Library of Munich, Germany.
    17. repec:pkk:sfyr17:20-34 is not listed on IDEAS

    More about this item

    Keywords

    shadow economy; direct democratic institutions; district magnitude; good governance;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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