Determinants of the Informal Economy in EU Countries

Ozan Gülhan
Alban Hetemi
Egzon Osmani
JEL codes: 
C39 - Other, C82 - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Analysis, D73 - Bureaucracy; Administrative Processes in Public Organizations; Corruption, E26 - Informal Economy; Underground Economy, H26 - Tax Evasion, O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements.
The purpose of the paper is to explore determinants of informal economy for EU countries’ economies which contributes to the current literature. The authors used a dynamic panel Generalised Methods of Moments (GMM) technique. Results are provided and hypothesis are tested that tax burden, regulatory burden and weak legal environment stimulate economic agents to perform activities through informal economy. Comparing with other studies, results show that tax burden has significant and positive effect on informal economy. According to the results of monetary freedom, rule of law, corruption and gross national income, they have significant negative effects on informal economy. The direction of these effects is not in line with past literature for corruption which is found negative and contrary to literature. The key contribution of the paper is that it provides clear results about determinants of informal economy in EU countries which is important for academics, researchers and policy makers.
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