The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

Liliane Giardino-Karlinger

World Development, 2009, vol. 37, issue 10, 1600-1611

Abstract: Summary This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure.

Keywords: shadow; economy; competition; corruption; OECD; Asia; Eastern; Europe (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (8)

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