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Energy based estimation of the Shadow Economy: The role of Governance Quality

Dimitrios Psychoyios (), Olympia Missiou () and Theologos Dergiades ()
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Dimitrios Psychoyios: University of Piraeus
Olympia Missiou: International Hellenic University

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: The shadow economy (SE) is a pathological normalcy, not only in developing countries but also in developed ones, causing disagreeable distortions in the real economy. In this paper, we estimate the size of the informal sector in nineteen countries of the European Union (EU) by implementing three variations of the physical input approach (we use electricity consumption as input). All estimates show that EU countries experience high shadow economy levels with a decreasing trend. Moreover, we assess the explanatory power of three governance quality indicators of the informal sector using a set of panel regression specifications as well as a set of quantile regression specifications. Both approaches show that overall governance quality is the most prominent factor in determining the SE levels. Given the inherent advantage of quantile regression to identify impact differentiations across the conditional distribution of the dependent variable a significant policy action is revealed. In particular, countries with high shadow economy levels can reduce their informal sector, at an increasing rate, by improving governance quality.

Keywords: Shadow economy; Energy; Panel and Quantile regression; Governance quality. (search for similar items in EconPapers)
JEL-codes: E26 G15 O17 O52 Q43 (search for similar items in EconPapers)
Date: 2019-11, Revised 2019-11
New Economics Papers: this item is included in nep-ene, nep-iue and nep-mac
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