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Abstract The size and development of the shadow economy of 21 OECD countries is estimated, using the MIMIC estimation procedure. The analysis finds that an increased burden of taxation and social security payments, combined with intensive labor market regulation, quality of state institutions, and tax morale, are the driving forces for the shadow economy. The public institution of federalism has no statistically significant effect on the shadow economy. Finally, on the one side, incentive-oriented policy means are suggested so that any “black” value added can be transformed into official value added, and on the other side, it is important to have public institutions which work efficiently and act as a constraint for selfish politicians.
Friedrich Schneider (Fri,) studied this question.