Institutions, policies and economic development. What are the causes of the shadow economy?

Abstract

What are the causes of the shadow economy? We provide new answers to this old question. The sharp distinction between theoretical priors on the institutional determinants of the shadow economy and the technique used for its measurement is the first novel contribution of the paper. The second innovation is that, unlike previ- ous contributions, we document a specific role for institutional variables in shaping economic incentives to "go underground", irrespective of the stage of economic de- velopment. The third innovation is that - after controlling for institutional quality and for the level of development - public expenditures have a negative impact on the shadow economy.Institutional quality, shadow economy.