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What Determines the Shadow Economy? An Extreme Bounds Analysis

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  • Mohammed Nayel Abu Alfoul

    (Department of Accounting, Economics and Finance, School of Business, Law and Entrepreneurship, Swinburne University of Technology, Hawthorn, VIC 3122, Australia)

  • Ibrahim Naser Khatatbeh

    (Department of Banking and Financial Sciences, Faculty of Economics and Administrative Sciences, Hashemite University, Zarqa 591504, Jordan)

  • Fouad Jamaani

    (Department of Economics and Finance, College of Business Administration, Taif University, P.O. Box 11099, Taif 21944, Saudi Arabia)

Abstract

The purpose of this paper was to identify the leading causes determining the shadow economy at the global level. The empirical analysis used was the Sala-i-Martin version of extreme bounds analysis (EBA) applied to a cross-sectional sample of 132 countries. The results suggested that the quality of institutions is the primary determinant of the shadow economy. The results showed that only four out of six factors of the quality of institutions proved to be robust determining factors of the shadow economy; they are bureaucracy quality, law and order, corruption, and internal conflict. Moreover, monetary freedom and secured property rights are also robust and negatively related to the shadow economy. An interesting result is that information and communication technology (ICT) development is vital to the shadow economy. Mainly, internet usage is robust and negatively associated with the shadow economy. Furthermore, inflation and poverty emerge as key determining factors of the shadow economy. Our findings will aid in the development of recommendations for potential strategies to minimize the international extent of the shadow economy.

Suggested Citation

  • Mohammed Nayel Abu Alfoul & Ibrahim Naser Khatatbeh & Fouad Jamaani, 2022. "What Determines the Shadow Economy? An Extreme Bounds Analysis," Sustainability, MDPI, vol. 14(10), pages 1-22, May.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:10:p:5761-:d:812288
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