Analysis of Energy Price's Impact on Shadow Economies Around the World

We assume that a growth of energy prices could create incentives for the firms to hide their incomes. To verify this hypothesis we analyze a model of a representative firm that optimizes the size of the hidden income under conditions of non-rigid external control. We found that an improvement of institutional environment in the economy helps to reduce the share of hidden income in the total revenue. To test the hypothesis suggested empirically we run regressions for the variables of shadow economy in GDP shares within the time period 2003-2008 using both already existing data on the size of shadow sector in the other economies and the data constructed by the authors on the basis of modified demand for money method. As opposed to the modifications used before, our methodology is applied to cross-country samples. Using in the regression a specific interaction term being a combination of a tax burden variable and the institutional strength index made it feasible to take into account an important fact that under bad institutions a higher tax level means also a higher shadow economy size but given good institutions - vice versa. Moreover with implementation of model calibrating we applied an estimating algorithm that enables the presence of foreign currency (US dollar in our case) in shadow economy's transactions. Finally our hypothesis was confirmed both using cross-section and panel data analysis, estimations demonstrated stability of its value and sign whatever method of analysis has been used.