The Relationship Between Institutional Quality and Shadow Economy
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https://doi.org/10.5281/zenodo.8364999Keywords:
Institutional Quality, Shadow Economy, EU-15, Panel DataAbstract
Since not all economic activities are under the control of governments, the existence of the shadow economy is inevitable. In this context, the shadow economy includes all unregistered economic activities that contribute to official GDP. The shadow economy, which is global and has increased in prevalence in recent years, is considered a by-product of underdevelopment. A weaker institutional quality context is often considered as potential drivers of the shadow economy. On the other hand, it is also emphasized that the shadow economy will decrease as the level of economic development increases. In this study, the relationship between the shadow economy and institutional quality in the EU-15 countries and Turkey in the 2003-2012 period was examined. In the study using panel data analysis methods, a long-term relationship between variables was found. Canning and Pedroni (2008) panel causality was used to determine the direction and sign of causality after the long-term relationship. According to the results of the causality analysis, a bidirectional causality relationship was found between the shadow economy and institutional quality across the panel. When examined in terms of coefficients, negative causality was found from institutional quality to the shadow economy, and positive causality, with a very low effect, was found from the shadow economy to institutional quality.
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