Institutional Governance Effect on the Shadow Economy in Asia

This paper analyses how institutional governance, affect the shadow economy, using an Asian country data. The literature strongly emphasizes the quantitative importance of these factors to understand the level and changes of shadow economy. However, the limited number of studies uses cross-sectional country data with a relatively few number of observations, and hardly any paper has investigated governance and provides evidence using within country data. Using more than 35 proxies that measure institutional governance factors and political behavior we find strong support that its increase leads to a smaller shadow economy. Furthermore, an increase in poverty and political stability increases the size of the shadow economy.