Connectivity matters: the conditional association between E-Government maturity and shadow economy size

This paper examines whether the association between e-government maturity and shadow economy size depends on the level of telecommunications infrastructure. We develop a theoretical account in which connectivity does two things at once: it extends access to public digital services, and it expands private digital markets that absorb part of the cost-sensitive informal population. Because both act on the same finite population, the marginal formalisation return to e-government maturity should diminish as connectivity rises. Using 10 waves of the UN E-Government Survey covering 105 countries between 2003 and 2020, a two-way fixed-effects specification yields the positive and significant interaction this implies. Further, the interaction is stronger where the informal sector is structurally larger, measured by agricultural employment, and the attenuation reproduces on the European Commission VAT compliance gap, an administrative outcome independent of the model-based series. For policymakers, the association between e-government maturity and informality is strongest where connectivity is limited and the informal sector is large, and it weakens as connectivity rises. Where connectivity is already high, improvements in e-government maturity are unlikely to register in shadow economy statistics. Identification rests on cross-national rather than within-country variation, so the results are reported as conditional associations rather than causal effects.