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The not so dark side of trust: Does trust increase the size of the shadow economy?

  • Johanna D'Hernoncourt
  • Pierre-Guillaume Méon

This paper reports a negative relationship between the size of the shadow economy and generalized trust, in a sample of countries, both developed and developing. That relationship is robust to controlling for a large set of economic, policy, and institutional variables, to changing the estimate of the shadow economy and the estimation period, and to controlling for endogeneity. It is independent from trust in institutions and from income inequality, and is mainly present in the sample of developing countries. Those findings suggest that the tax compliance effect of trust dominates its role as a substitute for the formal legal system.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/98287.

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Date of creation: Jan 2012
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Publication status: Published in: Journal of economic behavior & organization (2012) v.81 n° 1,p.97-121
Handle: RePEc:ulb:ulbeco:2013/98287
Note: SCOPUS: ar.j
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