Public Choice

, Volume 144, Issue 1–2, pp 215–238

Corruption and the shadow economy: an empirical analysis

Open Access


This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and the shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 98 countries. Our results show that there is no robust relationship between corruption and the size of the shadow economy when perceptions-based indices of corruption are used. Employing an index of corruption based on a structural model, however, corruption and the shadow economy are complements in countries with low income, but not in high income countries.


Corruption Shadow economy Regulation Tax burden 

JEL Classification

D73 H26 017 05 

Copyright information

© The Author(s) 2009

Authors and Affiliations

  1. 1.Center for European, Governance and Economic Development Research (cege)Georg-August University GoettingenGoettingenGermany
  2. 2.KOF Swiss Economic InstituteZurichSwitzerland
  3. 3.IZABonnGermany
  4. 4.CESifoMunichGermany
  5. 5.Department of EconomicsUniversity of LinzLinz-AuhofAustria

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