The influence of direct democracy on the shadow economy

Abstract

We analyze, both theoretically and empirically, the influence of direct democratic institutions on the size and development of shadow economies. Our model suggests that, as the extent of direct democracy increases, implemented fiscal policies more nearly reflect the preferences of citizens and so reduce their incentives to operate in the informal sector. This theory implies a negative relationship between the extent of direct democracy and the size of the country's shadow economy. We also theorize that direct democracy has a greater effect in reducing the informal sector when the former is at low or intermediate values and when the electoral system is characterized by a larger district magnitude. An empirical investigation of a sample of 57 democracies confirms our model's predictions. JEL: O17, P16, H11, H26

Shadow Economy and its Impact on Demand at the Investment Market of the Country

“…Another factor, observed in terms of the influence in the shadow economy, is the confidence level in the government and good governance. Teobaldelli and Schneider (2013), confirmed that countries where the fiscal regulation of the economy is carried out on a democratic base, had lower shadow economy.…”

Examining the Effective Social and Economic Factors on Underground Economy

“…That Tax and social security burdens and Quality of Institutions are the most effective factors (Dell'Anno, 2007., Gomez and Pardo, 2007., Dreher and Schneider, 2009., Dreher et al, 2009., Schneider, 2010., Teobaldelli, 2011., Teobaldelli and Schneider, 2012., Kucera and Roncolato, 2008., Torgler and Schneider, 2009., Feld and Frey, 2007.…”

Poverty and the shadow economy: The role of governmental institutions

“…Yet, besides economic factors such as the prevalence of poverty that might drive the shadow economy, the extant literature has identified government institutions among the determinants of the shadow economy (see, e.g., Berdiev & Saunoris, 2018;Berdiev, Saunoris, & Schneider, 2018a;Dreher, Kotsogiannis, & McCorriston, 2009;Friedman, Johnson, Kaufmann, & Zoido-Lobaton, 2000;Johnson, Kaufmann, Shleifer, Goldman, & Weitzman, 1997;Saunoris & Sajny, 2017;Schneider, 2010Schneider, , 2011Teobaldelli & Schneider, 2013;Torgler & Schneider, 2009). In general, research has shown that high quality government institutions increase the benefits of participating in the formal economy or increase the opportunity cost of moving to the informal economy.…”