What Determines the Shadow Economy? An Extreme Bounds Analysis

Abstract

The purpose of this paper was to identify the leading causes determining the shadow economy at the global level. The empirical analysis used was the Sala-i-Martin version of extreme bounds analysis (EBA) applied to a cross-sectional sample of 132 countries. The results suggested that the quality of institutions is the primary determinant of the shadow economy. The results showed that only four out of six factors of the quality of institutions proved to be robust determining factors of the shadow economy; they are bureaucracy quality, law and order, corruption, and internal conflict. Moreover, monetary freedom and secured property rights are also robust and negatively related to the shadow economy. An interesting result is that information and communication technology (ICT) development is vital to the shadow economy. Mainly, internet usage is robust and negatively associated with the shadow economy. Furthermore, inflation and poverty emerge as key determining factors of the shadow economy. Our findings will aid in the development of recommendations for potential strategies to minimize the international extent of the shadow economy.

Nexus Between Terrorism and Shadow Economy in Developing Countries: An Empirical Investigation by Using Structural Equation Models (SEMs)

“…Our empirical findings reinforce the widely accepted concept that unregulated shadow economic activities serve as a breeding ground for terrorism, particularly in regions characterized by weak or absent formal economic and political infrastructures. Notably, our research emphasizes that an expansion of the shadow economy in developing nations relates to a reduction in terrorism control (Abu Alfoul et al, 2022;Hutchinson & O'Malley, 2007;Jadoon & Milton, 2022;Pieth, 2017;Schneider & Buehn, 2018). Moreover, our results verify the concentration of terrorist activities in regions marked by ethnic and religious conflicts.…”

“…Our empirical findings support the maxim that unregulated shadow economic activities contribute to the sustenance and proliferation of terrorism, particularly in regions where formal economic and political structures are weak or absent. Empirical findings of our research indicate that an increase in the shadow economy in developing countries reduces the control of terrorism (Abu Alfoul et al, 2022;Hutchinson & O'Malley, 2007;Jadoon & Milton, 2022;Pieth, 2017;Schneider & Buehn, 2018). Our results also conventionally demonstrated that all terroristic acts are concentrated in locations where ethnic and religious conflicts predominate.…”

Taxes and social instability: How large corporations and wealthy taxpayers hide taxable money?

“…or when legal activities are carried out under illegal conditions. The latter category includes strategies such as undeclared employment, non-declaration of employees, under-invoicing, smuggling, corruption and fraudulent ac-counting (Abu Alfoul et al, 2022;Torgler and Schneider, 2009). These underground economy activities represent significant losses for the tax authorities.…”