Does the economic freedom hinder the underground economy? Evidence from a cross-country analysis

Elena D’Agostino (), Marco Alberto De Benedetto () and Giuseppe Sobbrio ()
Additional contact information
Elena D’Agostino: University of Messina
Marco Alberto De Benedetto: Finance and Statistics, University of Calabria
Giuseppe Sobbrio: University of Messina

Economia Politica: Journal of Analytical and Institutional Economics, 2023, vol. 40, issue 1, No 12, 319-341

Abstract: Abstract We evaluate the impact that the economic freedom exerts on the shadow economy for a sample of 152 countries from 1995 to 2017. In order to solve endogeneity issues, we rely on an instrumental variable approach and find that a change in the economic freedom index, induced by the level of independence of financial markets from government actions, adversely affects the hidden economy. To corroborate the interpretation of our results we also show how each subcomponent of the economic freedom index explains the downward change registered in the shadow economy. Further, the negative effect is mainly found in countries characterized by a low level of democracy and strong corruption, whereas in more democratic and less corrupt countries the economic freedom positively affects the size of the shadow economy. Consistent with these findings, we also highlight that the effect of the composite indicator of economic freedom on the hidden economy is U-shaped and this relationship is exclusively driven by both business regulation and the freedom in the legal system and property rights.

Keywords: Shadow economy; Economic freedom; Democracy; TSLS (search for similar items in EconPapers)
JEL-codes: C23 O17 P10 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s40888-022-00288-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:epolit:v:40:y:2023:i:1:d:10.1007_s40888-022-00288-2

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/40888

DOI: 10.1007/s40888-022-00288-2

Access Statistics for this article

Economia Politica: Journal of Analytical and Institutional Economics is currently edited by Alberto Quadrio Curzio

More articles in Economia Politica: Journal of Analytical and Institutional Economics from Springer, Fondazione Edison
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().