The Changing Nature of the OECD Shadow Economy

As recently suggested, the shadow economy and its determinants (taxation, regulations, corruption, etc.) are linked such that just two stable equilibria are possible. In the good one there is a small hidden sector, large fiscal revenues and honest/appreciated institutions. The other (bad) equilibrium is quite the opposite. Our paper examines the links between these variables in relatively uncorrupt systems. Unlike mainstream literature, we suggest that a continuum of SE equilibrium rates can emerge and that taxation and underground activities can be positively correlated. Empirical evidence for OECD countries broadly supports the model