Do disease epidemics force economic activity underground? International evidence.

Abstract

This article studies the impact of disease epidemics on the worldwide prevalence of the shadow or the underground economy. The informal sector has low entry barriers and provides an easy short‐term option for the supply of goods and services during epidemics when traditional supply lines are cut or strained. Furthermore, the enforcement resources might be directed elsewhere during epidemics, lowering the expected costs of shadow operations. Using data for over 125 nations, we find that the incidence of epidemics positively and significantly contributes to the spread of the underground sector. These findings withstand a series of robustness checks.