The Determinants of the Shadow Economy: The Case of Greece

Abstract

This paper aims at assessing the relative importance of various factors as key determinants of the size of the shadow economy in a sample of OECD countries. Using panel data for a group of 19 countries for the 2003 – 2008 period, we find that the quality of governance, the regulatory framework in the product, labor and credit markets and the tax burden both in the sense of the direct cost on entrepreneurial activity and the cost of compliance to the tax administration framework, are the most important factors affecting the part of the economic activity that takes place outside the official sector, that is the shadow or underground economy. These results are used to evaluate the potential gains Greece could obtain, in the case it could converge to the best practice or even to the average levels of the determining factors of the rest of the OECD countries.