Corruption and the shadow economy: an empirical analysis

TLDR

The study examines how the shadow economy and corruption interact, hypothesizing they are substitutes in high‑income countries and complements in low‑income countries. The hypotheses are tested using a cross‑section of 98 countries. Results show no robust relationship when using perception‑based corruption indices, but when using a structural‑model‑based index, corruption and the shadow economy are complements in low‑income countries but not in high‑income ones.

Abstract

This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and the shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 98 countries. Our results show that there is no robust relationship between corruption and the size of the shadow economy when perceptions-based indices of corruption are used. Employing an index of corruption based on a structural model, however, corruption and the shadow economy are complements in countries with low income, but not in high income countries.