The determinants of the hidden economy in developed and developing countries

Abstract

ABSTRACT This paper examines whether there is a difference in the hidden economy’s set of determinants across developed and developing countries. Applying extreme bounds analysis (EBA) to a cross-sectional dataset of 33 developed and 97 developing countries, we find a considerable variation in the determinants of the hidden economy across developed and developing countries. The results show that internet usage, inflation, financial development, poverty, and monetary freedom are robust determinants of the hidden economy exclusively in developing countries. Whereas the time required to start a business and GDP per capita growth play a crucial role exclusively in developed countries. Remarkably, the property rights index is the only determinant that is robust in both types of countries. These findings offer important insights for policymakers seeking to address the challenges posed by the hidden economy.