The devil is in the shadow. Do institutions affect income and productivity or only official income and official productivity?
This paper assesses the relationship between institutions, output, and productivity when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total (“corrected”) factor productivity becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness.
- The devil is in the shadow. Do institutions affect income and productivity or only official income and official productivity?
- Open Access
- Available under Open Access This content is freely available online to anyone, anywhere at any time.
Volume 158, Issue 1-2 , pp 121-141
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
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- Shadow economy
- Aggregate productivity
- Development accounting
- Industry Sectors
- Author Affiliations
- 1. Alfred-Weber-Institute for Economics, Heidelberg University, Bergheimer Strasse 58, 69115, Heidelberg, Germany
- 2. University of Goettingen, Goettingen, Germany
- 3. CESifo, Munich, Germany
- 4. IZA, Bonn, Germany
- 5. KOF Swiss Economic Institute, Zurich, Switzerland
- 6. Centre Emile Bernheim, Université Libre de Bruxelles (ULB), CP-114/03, avenue F.D. Roosevelt 50, 1050, Bruxelles, Belgium
- 7. Department of Economics, Johannes Kepler University of Linz, 4040, Linz-Auhof, Austria