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Why does the size of the shadow economy vary across nations

Authors

Keywords
shadow economy, income concealment, institutional effectiveness, tax burden, the vicious cycle

Summary
This study examines the shadow economy as a macroeconomic and institutional phenomenon that varies across countries. The main objective is to explain these differences by analyzing factors such as tax burden, institutional quality, regulatory environment, and labor market conditions. The study highlights the lack of a unified definition, with the shadow economy most commonly understood as legal activities deliberately concealed from public authorities. The analysis shows that it leads to an underestimation of real GDP and is measured through direct, indirect, and mixed methods. It is found that its share is lower in developed countries, while in less developed economies it often plays a compensatory role. In conclusion, the size of the shadow economy is determined by the interaction between economic incentives and institutional factors.

JEL: E26, O17, F63
Pages: 14
DOI:  https://doi.org/10.58861/tae.grdier.2026.05

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