THE NATURE OF THE UNDERGROUND ECONOMY. SOME EVIDENCE FROM OECD COUNTRIES

Economic theory suggests that taxation, regulations, efficiency of the bureaucracy and corruption are among the causes of the underground economy. The association between these variables is investigated by using panel regression techniques. The results show that, for OECD countries in the 1990s, the underground economy was positively correlated mainly with institutional failures and, to a lesser extent, with taxation and market regulations. Reflecting a sustained expansion of their public sectors, many OECD countries have raised the tax burden up to late 1990s and improved their institutions. This has led regulations and taxation, excluding social contributions, to increase their association with the shadow economy in the area.