The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

Liliane Giardino-Karlinger

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 42 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is weaker in high-income, high-tax, low-corruption countries that provide public services which make it worthwhile for firms to operate in the official economy despite growing competitive pressure.

JEL-codes: H26 L11 O17 (search for similar items in EconPapers)
Date: 2008-06
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Journal Article: The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:vie:viennp:vie0802

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