Abstract
This study endeavours to expand our knowledge on the role of colonial history, socialist history, religion, and legal systems in explaining the size of the shadow economy across countries. Empirical analysis is carried out for a global sample of 148 countries from 2002 to 2017. Besides formal institutional quality, four other factors of institutions such as colonial history, dominant religion, socialist or socialist history, and origin of the legal system. First, formal institutions are reaffirmed as important factors in reducing the shadow economy. Second, colonial history, socialist history, religion, and legal systems are found to be critical in explaining persistent differences in the size of the shadow economy between countries. Specifically, after controlling for key determinants of the shadow economy, countries with one dominant religion, socialist history, mixed legal system, or common law system appear to have higher levels of shadow economy. In contrast, countries with a colonial history or civil law system seem to have lower levels. Third, there are some heteroscedastic effects of other determinants on the shadow economy in colonial history, socialist history, religion and legal systems. Last, the role of colonial history, socialist history, religion, and legal systems in clarifying the size of the shadow economy seems to be heteroscedastic across seven regions.
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Notes
The shadow economy is given various names, such as informal economy, unofficial economy, or underground economy. They are used with same meaning as shadow economy in this study.
Mixed legal systems can have either civil or common law origin, along with other legal systems such as religious law and customary law.
for the mixed legal system.
According to the dataset of Medina and Schneider (2019), there are 157 countries, and we drop nine to arrive at 148 countries in the final sample.
The study of C. P. Nguyen and Su (2021) documents that increases in economic uncertainty (e.g., the economic crisis) increase the shadow economy. We have added economic uncertainty as an additional control variable for robustness check (see Table A2, Appendix).
This result has been checked for robustness with other measures of shadow economy and is available upon request.
In Model 8, with fixed effects of legal systems, civil law is estimated as a baseline case.
This result has been checked for robustness with other measures of shadow economy and is available upon request.
This result has been checked robustness with other measure of shadow economy and is available upon request.
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This research is funded by University of Economics Ho Chi Minh City, Vietnam.
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Nguyen, C., Nguyen Quang, B. & Su, T. Institutional frameworks and the shadow economy: new evidence of colonial history, socialist history, religion, and legal systems. J. Ind. Bus. Econ. 50, 647–675 (2023). https://doi.org/10.1007/s40812-023-00274-0
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DOI: https://doi.org/10.1007/s40812-023-00274-0