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Determinants of the Informal Economy in EU Countries

Author

Listed:
  • Ozan Gülhan
  • Alban Hetemi
  • Egzon Osmani

Abstract

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.

Suggested Citation

  • Ozan Gülhan & Alban Hetemi & Egzon Osmani, 2020. "Determinants of the Informal Economy in EU Countries," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 23(75), pages 2-15, March.
  • Handle: RePEc:rej:journl:v:23:y:2020:i:75:p:2-15
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    References listed on IDEAS

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    More about this item

    Keywords

    Informal economy; legal environment; regulatory quality;
    All these keywords.

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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