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Nonlinearity between the Shadow Economy and Level of Development

Dong Frank Wu () and Friedrich Schneider ()
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Dong Frank Wu: International Monetary Fund

No 12385, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper is the first attempt to directly explore the long-run nonlinearity of the shadow economy. Using a dataset of 158 countries over the period from 1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size and GDP per capita. Our results imply that the shadow economy tends to increase when economic development surpasses a given threshold or at least does not disappear with economic growth. Our findings suggest that special attention should be given to the country's level of development when designing policies to tackle issues related to the shadow economy.

Keywords: shadow economy; level of development; nonlinearity; GDP per capita (search for similar items in EconPapers)
JEL-codes: E26 H26 O17 O43 I25 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-05
New Economics Papers: this item is included in nep-fdg, nep-iue and nep-mac
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