Crime and the Shadow Economy: Evidence from BRICS Countries

Abstract

AbstractThe paper investigates the impact of crime on the dimension of the shadow economy in the BRICS countries. To achieve this research objective, we collect data from the Numbeo database, World Development Indicators, Heritage Foundation, and Worldwide Governance Indicators for 2001–2017. The Bayesian linear regression strategy is employed to discover the determinants of the informal sector. We apply the normal prior suggested by (Block et al., J. Fam. Bus. Strat. 2:232–245, 2011). Also, the posterior distributions of all parameters in the model are generated through the Markov Chain Monte Carlo (MCMC) approach and Gibbs sampling. The results indicate that crime has a reversed U-shaped association with the shadow economy size in the BRICS countries between 2001–2017. Specifically, if the crime value does not exceed the turning point, this factor can positively impact the shadow economy. However, if the crime value is above the turning point, the relationship may change. Moreover, we find that gross domestic product (GDP) growth, the rule of law, corruption control, and government effectiveness adversely affect the shadow economy. By contrast, trade openness and foreign direct investment (FDI) have beneficial effects on the shadow economy. Meanwhile, government spending can positively impact the shadow economy once the expenditure is below a certain level.KeywordsBayesianCrime rateShadow economyBRICS