Modeling the Shadow Economy. Why Does the Bulgarian Carry out Undeclared Employment?

Abstract

The shadow economy is a complex phenomenon that impacts all aspects of one country’s economic system. One theory explaining the emergence of the shadow economy holds that it results from the breach of the civil contract and serves as the individual’s response to the inefficiency of the state’s institutions. On its part the shadow economy has a negative impact on the state budget and is able to distort basic indicators such as growth, unemployment, real GDP. That’s why it is important for policy makers to know what the reasons for such behavior are. Using information from a survey of people in all areas of Bulgaria, conducted in early 2020, this article explores the primary causes of Bulgarians’ participation in shadow economic activities, specifically in undeclared labor. Via linear and afterwards probit binary regression the article ascertains each respondent’s inclination to participate in set activities based on their responses to a question asking why they believe some persons in their sector of employment opt to get some of their payment “in hand.” The findings are in favor of authorities and managers, because knowing the main drivers of the shadow economy, they can take measures aimed directly at the causes of such behavior.