Asymmetric effects of urbanization on shadow economy both in short-run and long-run:New evidence from dynamic panel threshold model

Abstract

• The scale of shadow economy in China varies greatly from province to province. • The entropy weight method is applied for comprehensive urbanization measurement. • Symmetric and asymmetric estimation for both short-term and long-term analysis. • Urbanization level has an inversed U-shaped impact on the scale of shadow economy. Urbanization and shadow economy are both common social problems in developing countries, yet rare studies have explored their potential relationships. Based on the provincial panel data in China, this paper estimates both the short-run and long-run non-linear relationship between urbanization and shadow economy combining with GMM (Generalized method of moments) and threshold analysis specifications, for symmetric analysis and asymmetric analysis, respectively. This paper also estimates if shadow economy is consistent with the EKC (Environment Kuznets Curve) assumption, and including other explanatory variables such as energy consumption, FDI (Foreign Direct Investment), tertiary industry and environmental regulation. Results show that urbanization does have an inversed U-shaped effect on shadow economy, so does economic growth, for both symmetric and asymmetric analyses. Tertiary industry can redouble the scale of shadow economy, which is consistent with all four analysis aspects. Other explanatory variables show slight differences in either symmetric/ asymmetric or short-run/ long-run results.