Econometric analysis of influence by the factors on the volume of shadow economy in the countries of Europe

Abstract

PurposeThis study aims to identify the factors which influence the change in the volume of shadow economy in the countries of Europe to explain its growth or reduction through the change in the identified factors. This would help to determine which factors are worth impacting to reduce the volume of shadow economy in the countries of Europe.Design/methodology/approachThis work sets out an econometric analysis. For the purpose of making research calculations, MS Excel software package has been chosen. It has been decided to use linear multiple regression and several auxiliary tools allowing research accuracy to be increased.FindingsFinal model has shown that the levels of corruption and inflation have a positive effect on the volume of shadow economy. Also, with the low level of significance it has been proved that foreign direct investments have a negative impact on the volume of shadow economy. From the hypotheses, it has also been ascertained that the rule of law and gross domestic product influence the volume of shadow economy negatively. Therefore, the results of this study indicate that the magnitude of shadow economy can be controlled by increasing the efficiency of the rule of law and the economy’s growth.Research limitations/implicationsBecause of the limited data on such an indicator as the shadow economy, in this work, this study used data for only one year – 2015, which may reduce the objectivity and reliability of the results obtained. But because of the fact that 38 European countries were taken and, as a result, the selection was larger, objectivity is preserved. As a result, three hypotheses were confirmed.Practical implicationsFrom the point of view of practical implications, this study should help determine the number of parameters, which affect the volume of the shadow economy in a particular country in Europe. Understanding of such correlations will help to regulate the volume of the shadow economy, which will mostly affect the overall development of the country.Social implicationsFrom a point of view of social implications, this study will help to solve some problems in Europe countries. Because this study is focused on finding parameters that affect the shadow economy, it is possible to reduce the volume of shadow economy. This changes can lead to a number of social improvements, such as a reduction of crime, a reduction of poverty, a reduction of unemployment, an increase of revenues to the country's treasury and a general increase of living standards.Originality/valueWithin the framework of this work, unique empirical research has been undertaken. This work helps to establish the factors which are the most influential in respect of the volume of shadow economy and which graphically indicate the following: what precisely needs to be prioritized to overcome one of the crucial socioeconomic problems for the majority of European countries.