The Devil is in the Shadow: Do Institutions Affect Income and Productivity or Only Official Income and Official Productivity?
University of Heidelberg
Université Libre de Bruxelles (ULB); Université Robert Schuman Strasbourg III
Johannes Kepler University Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
CESifo Working Paper No. 2150
This paper assesses the relationship between institutions, output, and productivity, when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total ("corrected") factor productivity even becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness.
Number of Pages in PDF File: 44
Keywords: shadow economy, income, aggregate productivity, development accounting
JEL Classification: O11, O17, O47, O5working papers series
Date posted: December 3, 2007
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