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Considering the lack of the scientific studies on the selected topic, the authors of this article raise the aim to set up the definition of digital shadow economy and identify its distinctive features and channels. Thus far, the studies on illegal digital activities have covered ambiguous inter­pretations of digital shadow economy that incorporated both criminal and economic aspects of the activities performed. The results of the empirical research have enabled to formulate the definition of digital shadow economy that refers to illegal activities, such as digital service provision and sales of goods/services online, when operating exceptionally in digital space, the entities violate the existent legal norms and regulations with a pursuit of illegal mutual interest and material benefits. The newly formulated definition of digital shadow economy has served as a corner-stone for identification of the distinctive features and channels of this phenomenon. Hence, the results of the research may make a significant and weighty contribution to the development of the theory of economics and may raise the awareness of what the phenomenon of digital shadow economy implies. First published online: 09 Jan 2017

This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and the shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 98 countries. Our results show that there is no robust relationship between corruption and the size of the shadow economy when perceptions-based indices of corruption are used. Employing an index of corruption based on a structural model, however, corruption and the shadow economy are complements in countries with low income, but not in high income countries.

This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy, and corruption. It shows that an improvement in institutional quality reduces the shadow economy and affects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative effectiveness of institutional quality in the shadow and corruption markets. The analytics also show that the shadow economy and corruption are substitutes. The predictions of the model are empirically tested and confirmed.

Considering the development of the shadow economy of 36 European and OECD countries over the period from 2003 to 2022 and the effect of the Coronavirus pandemic from 2020 onwards, the average size of the shadow economy of 36 European and OECD countries decreased from 16.48% of GDP in 2020 to 16.07% in 2021 (a decline of 0.41 percentage points). Due to a continued (forecasted) economic recovery in 2022, the average shadow economy of these 36 countries will slightly increase to 15.96% of GDP (average of all 36 countries): a very modest reduction of 0.11 percentage points.

Insolvency practitioners from 88 countries describe how debt enforcement will proceed against an identical hotel about to default on its debt. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern vs. piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. This measure is strongly correlated with per capita income and legal origin and predicts debt market development. Several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, influence efficiency.

This paper empirically investigates the three-way linkages amongst foreign direct investment (FDI), shadow economy and institutional quality by applying the panel dynamic simultaneous-equation modelling approach for a sample of 19 developing Asian countries over the period of 2002–2015. The empirical results by two-step System GMM show that institutional quality attracts inward FDI and FDI in its turn improves institutional quality, institutional quality is not only the cause but also the consequence of the shadow economy, and FDI inflows help reduce shadow economies though the channel of institutional improvement and lower shadow economies – which increase institutional quality – encourage FDI inflows. The empirical insights suggest helpful policy implications to deal with these dynamics simultaneously.

This article examines the impact of economic freedom on the shadow economy. Using panel data on over 100 countries from 2000 to 2015, we find that economic freedom is effective at reducing the spread of the shadow economy. Moreover, after disaggregating economic freedom into its five main components, the results suggest that all aspects of economic freedom significantly mitigate shadow activities with freedom from regulation exhibiting the largest impact. Overall, these findings are robust after accounting for alternate measures of the shadow economy, simultaneity, outliers, and nonlinearities. Thus, countries aiming to combat the spread of shadow activities would benefit from policies that support economic freedom.

This paper empirically examines how the size of the shadow economy affects environmental quality in sub-Saharan Africa (SSA). We apply the autoregressive distributed lag (ARDL) methodology to a panel of 22 SSA countries over the 1991–2015 period. Findings show that there is a negative relationship between the size of the shadow economy (in percentage of GDP) and CO2 emission both in the long and short run. Also, the size of shadow economy is found to be inversely related to CO2 emission in the long run for all income groups, but this effect is statistically significant only within the subpanel of lower-middle-income countries. Consistent with the scale effect, our findings suggest that there is no evidence that the shadow economy increases environmental degradation in SSA.

This paper reviews work that tests (1) how formal and informal institutions, and especially their interaction, affect participation in the shadow economy in transition countries; and (2) how participating in these shadow economies affects individuals' well-being. The key findings are that a clash of individuals' perceptions of formal institutions with their informal institutions increases involvement in the shadow economy. Conversely, a trustworthy relationship with the government and other individuals makes people more inclined to comply. The importance of their social and institutional context also appears in how individuals' involvement in the shadow economy relates to their well-being. These findings complement insights from the rich literature on tax morale, on the exchange between public institutions and citizens and between culture and institutions more generally. The findings also contribute to the institutional economic literature by empirically showing that: (1) focusing on formal institutions alone, that is strengthening the rule of law, is a necessary but insufficient response to the shadow economy; (2) taking informal institutions, such as individuals' trust and tax morale, into account is of equal importance; and (3) most importantly, formal and informal institutions go hand in hand, and their interaction should be an essential part of the new institutional perspective.

Asian developing countries face challenges of serious air pollution and large shadow economy. Fiscal policy is anticipated as a solution to cope with these obstacles. This paper empirically examines the impact of shadow economy on air pollution and the role of fiscal policy in moderating the impact through the two tools of government expenditure and taxation in 22 Asian developing countries during 2002–2015. The estimation results from the fixed effects and the system generalized method of moments show that air pollution is positively affected by the shadow economy; and expansionary fiscal policy can reduce air pollution through abating shadow economy, and can lessen the detrimental effect of shadow economy on the environmental quality. Specifically, the increase in government expenditure reduces the positive effect of shadow economy on air pollution, but a tax-hike intensifies it. It is also found a stronger negative impact of government expenditure, compared to positive impact of taxation, and a dominant impact of shadow economy on air pollution. The findings imply that policy-makers can use appropriate fiscal policies to control air pollution and to reduce the destructive effect of the informal economy on the environmental quality in developing countries. Especially, governments in developing countries should allocate more budgets on environmental projects in their fiscal reforms for the sake of moving to greener and more inclusive economies with low-carbon activities.