Beyond the Veil of Ignorance: The Influence of Direct Democracy on the Shadow Economy
41 Pages Posted: 5 Mar 2012
Date Written: February 29, 2012
In this paper we analyze the influence of direct democratic institutions on the size and development of the shadow economies. The framework developed predicts a negative relationship between the degree of direct democracy and the size of the shadow economy. Countries where direct democratic institutions support democratic life are expected to be characterized by a lower informal sector, ceteris paribus. The empirical / econometric investigation of a sample of 56 democracies confirms our core hypothesis and demonstrates that the effect of direct democratic institutions on the shadow economy is negative and quantitatively important; the results are robust and also depend on the interaction of direct democracy with other political institutions, such as district magnitude.
Keywords: shadow economy, direct democratic institutions, district magnitude, good governance
JEL Classification: O170, D780, H110, H260
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