Eastern Economic Journal

, Volume 45, Issue 2, pp 224–249 | Cite as

On the Relationship Between Income Inequality and the Shadow Economy

  • Aziz N. BerdievEmail author
  • James W. Saunoris
Original Article


We empirically investigate the linkages between income inequality and the shadow economy. Employing a panel vector autoregression model, we build impulse response functions to study the time path of income inequality following a shock to the shadow economy, and vice versa. Our results using panel data for 144 countries over the period 1960–2009 reveal a bidirectional positive relationship between the two: specifically, higher income inequality promotes the spread of the shadow economy while the development of the shadow economy contributes to income inequality. Overall, these findings withstand a variety of robustness checks.


Income inequality Shadow economy Panel VAR 

JEL Classification

D31 O17 



We thank Cynthia Bansak (editor), four anonymous referees, and participants at the Midwest Economics Association Conference (Cincinnati), Western Economic Association International Conference (San Diego), 5th International Conference on “The Shadow Economy, Tax Evasion and Informal Labor” (Warsaw) and International Atlantic Economic Conference (Montréal) for valuable suggestions. All remaining errors are our own.


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Copyright information

© EEA 2018

Authors and Affiliations

  1. 1.Department of EconomicsBryant UniversitySmithfieldUSA
  2. 2.Department of EconomicsEastern Michigan UniversityYpsilantiUSA

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