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Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis

  • Benno Torgler



  • Friedrich Schneider

This paper analyses how governance or institutional quality and tax morale affect the shadow economy, using an international country panel and also within country data. The literature strongly emphasizes the quantitative importance of these factors to understand the level and changes of shadow economy. However, the limited number of investigations use cross-sectional country data with a relatively small number of observations, and hardly any paper has investigated tax morale and provides evidence using within country data. Using more than 25 proxies that measure governance and institutional quality we find strong support that its increase leads to a smaller shadow economy. Moreover, an increase in tax morale reduces the size of the shadow economy.

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Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 210.

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Length: 64
Date of creation: 01 Feb 2007
Date of revision:
Handle: RePEc:qut:dpaper:210
Note: The School of Economics and Finance, Level 8, Z Block, Gardens Point Campus, 2 George Street, Brisbane, QLD 4001, Australia, email: ** Department of Economics, Johannes Kepler University of Linz, A-4040 Linz-Auhof, Austria. E-mail:, Both are research fellows of CREMA – Center for Research in Economics, Management and the Arts, Switzerland. We would like to thank Howard Abrams, Doris Aebi, Robert Cooter, Jesse Fried, John McNulty, Eric Talley, Luciano Benetti Timm and participants of the Law and Economics Workshop at UC Berkeley and the 2006 National Tax Association Conference in Boston for helpful comments and suggestions. Financial support from the Swiss National Science Foundation is gratefully acknowledged.
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