Push from the shadows: Does the shadow economy facilitate market exit of firms?

Abstract

This paper examines whether the presence of the shadow or underground economy facilitates the exit of firms from the markets they operate in. The shadow economy can induce exits when underground firms are formidable low‐cost competitors, but the shadow economy can delay or cancel exits when underground suppliers enable formal sector firms to lower costs and become more competitive. Using data across US states and using two alternative dimensions of exits, the results show that the presence of the underground sector makes market exit less likely. Another contribution of the paper lies in consideration of political explanations for firms' exit.