Trust, remittances, and the shadow economy: institutional and financial heterogeneity in a country-wave panel

Kamal Kasmaoui

Journal of Economic Studies, 2026, 1-21

Abstract: PurposeThis paper aims to revisit the relationship between generalised trust, remittances, and the size of the shadow economy by explicitly accounting for institutional quality, financial development, and cross-country heterogeneity. While previous studies, largely based on cross-sectional evidence, suggest that trust and remittances may influence informality, their causal roles remain unclear.Design/methodology/approachUsing an unbalanced country-wave panel and standard governance measures, the paper relies on fixed-effects models and Fixed-Effects Two-Stage Least Squares as the preferred specifications, complemented by Random-Effects Two-Stage Least Squares following Balestra and Varadharajan-Krishnakumar (1987) as a robustness check. Slope heterogeneity is formally tested using the Pesaran–Yamagata procedure. To address measurement concerns, the analysis is replicated using both MIMIC-based and DGE-based measures of the shadow economy.FindingsThe results show that economic development and institutional quality – particularly legal system effectiveness – are the most robust determinants of the shadow economy. Generalised trust is positively associated with informality in several specifications, although its significance is sensitive to estimator choice and the shadow-economy measure. Remittances are associated with lower informality in several instrumental-variable specifications, with stronger associations in more financially developed environments; however, both trust and remittances are generally statistically insignificant under the alternative DGE-based measure. These findings highlight the importance of institutional quality and financial intermediation in shaping the relationship between trust, remittances, and informality.Originality/valueThis study contributes by jointly analysing trust, remittances, institutions, and financial development within a country-wave panel framework. By explicitly accounting for endogeneity, cross-country heterogeneity, and alternative measures of the shadow economy, the paper provides a more nuanced assessment of the roles of trust and remittances and highlights the central importance of institutional quality and financial development in reducing informality.

Keywords: Shadow economy; Trust; Remittances; Institutions; Financial development; Fixed effects panel (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-03-2026-0243

DOI: 10.1108/JES-03-2026-0243

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