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The Influence of Economic Freedom on the Shadow Economy in Developed and Developing Countries

Freytag Andreas (), Schneider Friedrich () and Spiegel Sebastian E.
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Freytag Andreas: Department of Economics, Friedrich-Schiller University Jena, Carl-Zeiss-Str. 3, D-07743, Jena, Germany
Schneider Friedrich: Research Institute of Banking and Finance, University of Linz, Altenberger Str. 69, A-4040, Linz, Austria
Spiegel Sebastian E.: Friedrich-Schiller University Jena, Jena, Germany

The Economists' Voice, 2022, vol. 19, issue 2, 183-205

Abstract: We empirically analyze to what extent economic freedom can explain the size and development of the shadow economy in OECD and other European countries. We econometrically examine the relation between a change of the overall index of economic freedom and the change of the shadow economy. We undertake an econometric panel estimation of 141 countries over the period 2000–2007. Our results demonstrate that first, the higher the economic freedom, the lower is the shadow economy. This holds especially for the index-sub-component legal structure and security of property rights. The sub-component freedom to trade internationally provides further support for this relation, limited to cases of positive changes of economic freedom. Second, the effects are asymmetrically, they are stronger when economic freedom increases than in the case of a decrease.

Keywords: shadow economy; economic freedom; economic policy (search for similar items in EconPapers)
JEL-codes: H11 H26 O17 P16 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/ev-2022-0008

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