The Devil is in the Shadow: Do Institutions Affect Income and Productivity or Only Official Income and Official Productivity?

KOF Swiss Economic Institute Working Paper No. 179

41 Pages Posted: 19 Nov 2007

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Pierre-Guillaume Meon

Université Libre de Bruxelles (ULB); Université Robert Schuman Strasbourg III

Friedrich Schneider

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)

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Date Written: November 2007

Abstract

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.

Keywords: shadow economy, income, aggregate productivity, development accounting

JEL Classification: O11, O17, O47, O5

Suggested Citation

Dreher, Axel and Meon, Pierre-Guillaume and Schneider, Friedrich G., The Devil is in the Shadow: Do Institutions Affect Income and Productivity or Only Official Income and Official Productivity? (November 2007). KOF Swiss Economic Institute Working Paper No. 179, Available at SSRN: https://ssrn.com/abstract=1031095 or http://dx.doi.org/10.2139/ssrn.1031095

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Pierre-Guillaume Meon

Université Libre de Bruxelles (ULB) ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Université Robert Schuman Strasbourg III ( email )

47, Avenue de la Foret-Noire
Institut d'Etudes Politiques
67082 Strasbourg Cedex
France
33 3 88 41 77 21 (Phone)
33 3 88 41 77 78 (Fax)

Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria
+43 732 2468 8210 (Phone)
+43 732 2468 8208 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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