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The Devil Is in the Shadow. Do Institutions Affect Income and Productivity or Only Official Income and Official Productivity?

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  • Axel Dreher
  • Pierre-Guillaume Méon
  • Friedrich Schneider

Abstract

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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  • Axel Dreher & Pierre-Guillaume Méon & Friedrich Schneider, 2007. "The Devil Is in the Shadow. Do Institutions Affect Income and Productivity or Only Official Income and Official Productivity?," KOF Working papers 07-179, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:07-179
    DOI: 10.3929/ethz-a-005503049
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    Cited by:

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    2. Roberto Dell'Anno & Ferda Halicioglu, 2010. "An ARDL model of unrecorded and recorded economies in Turkey," Journal of Economic Studies, Emerald Group Publishing, vol. 37(6), pages 627-646, November.
    3. Christian Bjørnskov & Pierre-Guillaume Méon, 2015. "The productivity of trust," Post-Print CEB, ULB -- Universite Libre de Bruxelles, June.
    4. Bjørnskov, Christian, 2015. "Does economic freedom really kill? On the association between ‘Neoliberal’ policies and homicide rates," European Journal of Political Economy, Elsevier, vol. 37(C), pages 207-219.
    5. Charles Plaigin, 2009. "Exploratory study on the presence of cultural and institutional growth spillovers," DULBEA Working Papers 09-03.RS, ULB -- Universite Libre de Bruxelles.
    6. Philipp Harms & Philipp Meulen, 2012. "The demographics of expropriation risk," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(3), pages 809-832, July.
    7. Tomas Lichard & Jan Hanousek & Randall K. Filer, 2012. "Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation," Economics Working Paper Archive at Hunter College 438, Hunter College Department of Economics.
    8. Gylfason, Thorvaldur & Hochreiter, Eduard, 2009. "Growing apart? A tale of two republics: Estonia and Georgia," European Journal of Political Economy, Elsevier, vol. 25(3), pages 355-370, September.
    9. Dustin Chambers & Patrick A. McLaughlin & Laura Stanley, 2019. "Barriers to prosperity: the harmful impact of entry regulations on income inequality," Public Choice, Springer, vol. 180(1), pages 165-190, July.
    10. 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.
    11. Robert Gillanders & Sinikka Parviainen, 2018. "Corruption and the shadow economy at the regional level," Review of Development Economics, Wiley Blackwell, vol. 22(4), pages 1729-1743, November.
    12. Libman, Alexander, 2008. "Democracy and growth: is the effect non-linear?," MPRA Paper 17795, University Library of Munich, Germany.
    13. Hanousek, Jan & Kochanova, Anna, 2016. "Bribery environments and firm performance: Evidence from CEE countries," European Journal of Political Economy, Elsevier, vol. 43(C), pages 14-28.
    14. Efendic, Adnan & Pugh, Geoff & Adnett, Nick, 2011. "Institutions and economic performance: A meta-regression analysis," European Journal of Political Economy, Elsevier, vol. 27(3), pages 586-599, September.
    15. Abdeslam Marfouk, 2008. "The African brain drain: scope and determinants," DULBEA Working Papers 08-07.RS, ULB -- Universite Libre de Bruxelles.
    16. Emanuela Carbonara & Giuseppina Gianfreda & Enrico Santarelli & Giovanna Vallanti, 2019. "The Impact of Intellectual Property Rights on Labor Productivity: Do Constitutions Matter?," Working Papers LuissLab 19151, Dipartimento di Economia e Finanza, LUISS Guido Carli.

    More about this item

    Keywords

    Shadow economy; Income; Aggregate productivity; Development accounting;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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