Nonlinearity between the Shadow Economy and Level of Development

30 Pages Posted: 10 Jun 2019

See all articles by Dong Frank Wu

Dong Frank Wu

International Monetary Fund (IMF)

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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Abstract

This paper is the first attempt to directly explore the long-run nonlinearity of the shadow economy. Using a dataset of 158 countries over the period from 1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size and GDP per capita. Our results imply that the shadow economy tends to increase when economic development surpasses a given threshold or at least does not disappear with economic growth. Our findings suggest that special attention should be given to the country's level of development when designing policies to tackle issues related to the shadow economy.

Keywords: shadow economy, level of development, nonlinearity, GDP per capita

JEL Classification: E26, H26, O17, O43, I25

Suggested Citation

Frank Wu, Dong and Schneider, Friedrich G., Nonlinearity between the Shadow Economy and Level of Development. IZA Discussion Paper No. 12385, Available at SSRN: https://ssrn.com/abstract=3401153

Dong Frank Wu (Contact Author)

International Monetary Fund (IMF) ( email )

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Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

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

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Institute for the Study of Labor (IZA)

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