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Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006

Author

Listed:
  • James Alm

    () (Department of Economics, Tulane University)

  • Abel Embaye

    () (Department of Economics, University of Arkansas)

Abstract

The paper estimates the size of shadow economy for 111 countries for the years 1984 to 2006 based on the currency demand approach. An important innovation is our use of dynamic panel data methods, which allows us to make several important contributions. First, we estimate the shadow economy for a range of heterogeneous countries that previously could not be included in the same regression. Second, we include variables that measure institutional quality in countries, including a variable that measures enforcement efforts. Third, we account for the persistence of currency demand as it evolves over time. Our results indicate a substantial shadow economy across countries, ranging from 10 to 86 percent of GDP, with some tendency to grow over time. We also find that the shadow economy varies significantly by country income group. The mean shadow economy is 17 percent of GDP for OECD countries, 24 percent for non-OECD high income countries, 33 percent for upper middle income countries, 37 percent for lower middle income countries, and 38 percent for low income countries.

Suggested Citation

  • James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006," Working Papers 1303, Tulane University, Department of Economics.
  • Handle: RePEc:tul:wpaper:1303
    as

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    File URL: http://econ.tulane.edu/RePEc/pdf/tul1303.pdf
    File Function: First Version, February 2013
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Mai Hassan & Friedrich Schneider, 2016. "Modelling the Egyptian Shadow Economy: A Currency Demand and A MIMIC Model Approach," CESifo Working Paper Series 5727, CESifo Group Munich.
    2. James Alm, 2012. "Measuring, explaining, and controlling tax evasion: lessons from theory, experiments, and field studies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 54-77, February.
    3. James Alm, 2015. "Analyzing and Reforming Tunisia's Tax System," Commitment to Equity (CEQ) Working Paper Series 34, Tulane University, Department of Economics.
    4. Bibek Adhikari, 2015. "When Does Introducing a Value-Added Tax Increase Economic Efficiency? Evidence from the Synthetic Control Method," Working Papers 1524, Tulane University, Department of Economics, revised Nov 2015.
    5. 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.
    6. repec:elg:eechap:17640_12 is not listed on IDEAS
    7. Rajeev K. Goel & Michael A. Nelson, 2016. "Robust Determinants of the Shadow Economy: An International Comparison," CESifo Working Paper Series 5873, CESifo Group Munich.
    8. James Alm, 2014. "Tax evasion, labor market effects, and income distribution," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-91.
    9. Rajeev Goel & James Saunoris, 2014. "Global corruption and the shadow economy: spatial aspects," Public Choice, Springer, vol. 161(1), pages 119-139, October.
    10. Goel, Rajeev K. & Saunoris, James W., 2016. "Forms of Government Decentralization and Institutional Quality: Evidence from a Large Sample of Nation," ADBI Working Papers 562, Asian Development Bank Institute.
    11. repec:spr:eurase:v:7:y:2017:i:3:d:10.1007_s40822-017-0072-2 is not listed on IDEAS
    12. Schneider, Friedrich, 2017. "Restricting or Abolishing Cash: An Effective Instrument for Fighting the Shadow Economy, Crime and Terrorism?," International Cash Conference 2017 – War on Cash: Is there a Future for Cash? 162914, Deutsche Bundesbank, Frankfurt am Main.
    13. repec:kap:ejlwec:v:44:y:2017:i:1:d:10.1007_s10657-014-9451-2 is not listed on IDEAS
    14. International Monetary Fund, 2013. "The Federal Democratic Republic of Ethiopia; Selected Issues," IMF Staff Country Reports 13/309, International Monetary Fund.
    15. Berdiev, Aziz N. & Saunoris, James W., 2016. "Financial development and the shadow economy: A panel VAR analysis," Economic Modelling, Elsevier, vol. 57(C), pages 197-207.
    16. Alm, James & Shimshack, Jay, 2014. "Environmental Enforcement and Compliance: Lessons from Pollution, Safety, and Tax Settings," Foundations and Trends(R) in Microeconomics, now publishers, vol. 10(4), pages 209-274, December.
    17. Friedrich Schneider, 2017. "Restricting or Abolishing Cash: An Effective Instrument for Fighting the Shadow Economy, Crime and Terrorism?," Economics working papers 2017-08, Department of Economics, Johannes Kepler University Linz, Austria.
    18. Yilmaz BAYAR, 2016. "Public governance and shadow economy in Central and Eastern European countries," REVISTA ADMINISTRATIE SI MANAGEMENT PUBLIC, Faculty of Administration and Public Management, Academy of Economic Studies, Bucharest, Romania, vol. 2016(27), pages 62-73, Decembre.
    19. Petr Janský & Miroslav Palanský, 2016. "Fiscal decentralization and the shadow economy," WIDER Working Paper Series 172, World Institute for Development Economic Research (UNU-WIDER).
    20. Gillanders, Robert & Parviainen, Sinikka, 2015. "Corruption and the Shadow Economy at the Regional Level," MPRA Paper 64510, University Library of Munich, Germany.
    21. Goel, Rajeev K. & Saunoris, James W. & Schneider, Friedrich, 2017. "Drivers of the Underground Economy around the Millienium: A Long Term Look for the United States," IZA Discussion Papers 10857, Institute for the Study of Labor (IZA).
    22. Goel, Rajeev K. & Nelson, Michael A., 2016. "Shining a light on the shadows: Identifying robust determinants of the shadow economy," Economic Modelling, Elsevier, vol. 58(C), pages 351-364.
    23. Friedrich Schneider, 2017. "Implausible Large Differences in the Sizes of Underground Economies in Highly Developed European Countries? A Comparison of Different Estimation Methods," CESifo Working Paper Series 6522, CESifo Group Munich.

    More about this item

    Keywords

    tax evasion; shadow economy; currency demand method; panel data;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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