Institutional Determinants Of Shadow Economy In The Former Soviet Union Countries


This paper sheds light on how current levels of the shadow economy in the post-soviet countries deeply rooted to the way institutions and government objectives were formed in the past. The study covers the evolution of the shadow economy over more than half century to identify principal institutional determinants thereof. Since, once political and government institutions get organized in a certain way they have a tendency to maintain over time and shape perception of market-players about merits and demerits of the formal and informal economy provided by the existed institutions. We conducted empirical analysis for eight FSU countries over the period 1996-2015. The Ordinary Least Squares (OLS) regression model is used to draw general conclusion, along with iteratively reweighted least-squares (IRLS) regression estimations to check for robustness and the second stage least squares (2SLS) estimations to control for possible endogeneity. All regression results provide strong and persistent negative correlation between the size of the shadow economy and institutional quality measures of control of corruption, government effectiveness and rule of law. Similarly, the state-induced distortions, due to the high government intervention, less business and fiscal freedoms, also demonstrate significant impact on the share of underground economy in these countries.

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