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On the Relationship Between Income Inequality and the Shadow Economy

Aziz N. Berdiev () and James Saunoris
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Aziz N. Berdiev: Bryant University

Eastern Economic Journal, 2019, vol. 45, issue 2, No 4, 224-249

Abstract: Abstract We empirically investigate the linkages between income inequality and the shadow economy. Employing a panel vector autoregression model, we build impulse response functions to study the time path of income inequality following a shock to the shadow economy, and vice versa. Our results using panel data for 144 countries over the period 1960–2009 reveal a bidirectional positive relationship between the two: specifically, higher income inequality promotes the spread of the shadow economy while the development of the shadow economy contributes to income inequality. Overall, these findings withstand a variety of robustness checks.

Keywords: Income inequality; Shadow economy; Panel VAR (search for similar items in EconPapers)
JEL-codes: D31 O17 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1057/s41302-018-0120-y

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