Original Paper

Constitutional Political Economy

, Volume 21, Issue 3, pp 231-248

First online:

Regulation and shadow economy: empirical evidence for 25 OECD-countries

  • Dominik H. EnsteAffiliated withCologne Institute for Economic ResearchFaculty of Economics, University of CologneUniversity of Applied Science-Cologne Email author 

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New empirical findings for the impact of regulations on economic activities in the shadow economy are presented here. A comprehensive regulation index covering major fields (e.g. labour and product market regulation and the quality of institutions) has been used to analyze the relationship between the density of regulations and the size of shadow economies. The empirical results from 25 OECD countries for the time period 1995–2005 show that—apart from tax burden and tax moral—main causes for the development of the size of shadow economies are labour and product market regulations, overall regulations and poor quality of official public institutions and administration. These findings can provide additional information on policy measures to tackle the problem of growing shadow economies.


Regulation Quality of institutions Shadow economy Underground economy Random effects models

JEL Classification

O17 K42 J22 H26