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Challenging the popular wisdom. New estimates of the unobserved economy

  • Luisanna Onnis
  • Patrizio Tirelli


We estimate the unrecorded economy in 49 economies from 1981 to 2005. Our study is based on electricity consumption series which are fil- tered to account for technological change and for the changing weight of the energy-intensive industrial sector. In contrast with studies based on the MIMIC method, we obtain a reduction in the weight of the unobserved economy. Unlike La Porta and Shleifer (2008), we identify measures of institutional quality which are significantly related to the shadow econ- omy even after controlling for per-capita GDP. Thus the shadow economy should not be dismissed as the unpleasant side e¤ect of underdevelopment. Instead it is related to some specific institutional aspects that may well survive even when the economy reaches higher development stages. We identify strong substitution effects between official and unofficial sectors both in the long run and over the business cycle. This has important impli- cations for income convergence and for the relationship between volatility and growth.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 184.

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Length: 64 pages
Date of creation: Apr 2010
Date of revision: Apr 2010
Handle: RePEc:mib:wpaper:184
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