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The Influence of Direct Democracy on the Shadow Economy

Désirée Teobaldelli () and Friedrich Schneider ()

No 2013-16, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: We analyze, both theoretically and empirically, the influence of direct democratic institutions on the size and development of shadow economies. Our model suggests that, as the extent of direct democracy increases, implemented fiscal policies more nearly reflect the preferences of citizens and so reduce their incentives to operate in the informal sector. This theory implies a negative relationship between the extent of direct democracy and the size of the country’s shadow economy. We also theorize that direct democracy has a greater effect in reducing the informal sector when the former is at low or intermediate values and when the electoral system is characterized by a larger district magnitude. An empirical investigation of a sample of 57 democracies confirms our model’s predictions.

Keywords: shadow economy; direct democratic institutions; district magnitude; good governance (search for similar items in EconPapers)
JEL-codes: O17 P16 H11 H26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-iue and nep-pol
Date: 2013-07
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