The devil is in the shadow: do institutions affect income and productivity or only official income and official income and official productivity?

Axel Dreher (), Pierre-Guillaume Méon () and Friedrich Georg Schneider ()

No 07-22.RS, DULBEA Working Papers from ULB -- Universite Libre de Bruxelles

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 (search for similar items in EconPapers)
JEL-codes: O11 O17 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-eff
Date: 2007-11
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Published by: DULBEA - Université libre de Bruxelles, Bruxelles

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