Convergence of shadow economy across U.S. states

Abstract

ABSTRACT Using a novel shadow economy measure constructed from a two-sector dynamic deterministic general equilibrium model, this paper provides the first piece of evidence on the convergence dynamics of the shadow economy at the U.S. state level over the period 1999–2019. The result of the panel club convergence test demonstrates the absence of absolute convergence but also identifies the presence of six club memberships without an apparent regional conglomeration. Further analysis based on the ordered logit regression uncovers that factors such as gross state product, the share of higher education, government size, the share of union participation, capital tax rate, institutional quality, and unemployment rate significantly influence the club membership of the shadow economy. Understanding these findings is imperative for developing policies to curtail the spread of shadow economies across the states in the U.S.