Economic complexity and shadow economy: A multi-dimensional analysis

Abstract Our paper is the first attempt to examine the non-linear effects of economic complexity on the shadow economy. By applying diverse econometric techniques to a global sample of 42 low- income & lower-middle-income (LI&LMICs) and 30 upper-middle-income (UMICs) and 38 high- income (HICs) during the 2002-2017 period, our findings confirm the presence of a non-linear association between economic complexity outlook index and the shadow economy while economic complexity index has an increasingly significant and negative influence on shadow economy. Furthermore, a non-linear relationship between economic complexity and the shadow economy more likely exists either in the long run or in the high-income economy. Notably, we find that economic complexity plays a critical role in deteriorating the positive effects of uncertainty on the size of the shadow economy, while institutional quality significantly determines the effect of economic complexity.