PurposeThis study investigates the effect of shadow economy on environmental pollution and the role of institutional quality in moderating the impact in African countries between 1991 and 2015.Design/methodology/approachThe study employs three pollutant variables namely: carbon dioxide emissions per capita, methane emission and nitrous oxide emission as robustness check. Also, battery of methodologies; ordinary least squares, fixed effects and system generalised method of moments are used to drive out the conclusions of this study.FindingsThe findings reveal that shadow economy and institutional quality contribute significantly to environmental pollution in Africa. Further, the interactive effect of shadow economy and institutional quality worsens environmental quality in the region. This reveals that weak institutional quality recorded in the region increases the level of shadow economy, thereby intensifying environmental pollution.Practical implicationsThe study concludes that weak institutional framework in the region reinforces shadow economy and environmental pollution. Hence, findings from this study can help policymakers in the region to better understand the role of institutional quality in reducing shadow economy and environmental pollution.Originality/valueThis study enriches one’s understanding on the role of institutional quality in the relationship between environmental quality and shadow economy in African context. It investigates the direct and indirect impact of institutions and shadow economy on environmental quality. The study also uses three different robust variables to measure environmental pollution (carbon dioxide (CO2) emissions per capita, methane emission and nitrous oxide emission) for sensitivity analysis.
Purpose Several studies have examined the effect of formal economy (usually proxy by economic growth) on environmental quality; however, the symmetric and asymmetric impact of the informal economy on environmental quality has not been examined in Nigeria. Therefore, this study aims to explore the short- and long-run (a)symmetric effect of formal and informal economies and financial development on Nigeria’s environmental quality between 1984 and 2017. Design/methodology/approach The study uses ecological footprint to measure environmental quality. An increase in ecological footprint suggests a fall in environmental quality. Informal economy is calculated as a percentage of GDP using the currency demand approach. Autoregressive distributed lag (ARDL), nonlinear ARDL cointegration framework and vector error correction granger causality are used as estimation techniques. Findings The study’s outcomes establish the existence of asymmetric structure in the link between economic activities and the environment both in the short and long run. The asymmetric results reveal that positive and negative changes in the formal economy increase the ecological footprint in both periods. Hence, activities in the formal economy reduce environmental quality. On the other hand, positive and negative changes in the informal economy only positively influence the ecological footprint in the long run. In contrast, it negatively impacts the ecological footprint in the short run. This suggests that activities in the informal economy worsen the long-run environmental quality. Financial development has a positive influence on the ecological footprint, thus degrading the environmental quality. Furthermore, in the short run, a unidirectional relationship from the formal economy to the ecological footprint, while a bidirectional causality exists between informal and formal economies. Meanwhile, a unidirectional causality from the (in)formal economies and financial development to the ecological footprint was found in the long run. Practical implications The outcome of this study shows that both informal and formal economies contribute to ecological footprint; therefore, mainstreaming the informal economy into the formal economy will further increase the problem of environmental degradation and worsen environmental quality. Originality/value The study investigates the symmetric and asymmetric effect of formal and informal economies on environmental quality in Nigeria, which is largely missing in the empirical literature.
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