The Internet, economic uncertainty, and the shadow economy: "The Good, the Bad, and the Unknown"?

Abstract

This study investigates the influences of economic uncertainty and Internet usage on the informal economy. Notably, the study focuses on the effects of the association of economic uncertainty and Internet usage on the informal economy. The empirical analysis is carried out for a global sample of 124 economies from 1996 to 2017. Applying different estimates and different robustness checks, the results are consistent and robust. Internet usage leads to a decline in the shadow economy, while economic uncertainty has the effect of increasing the shadow economy. Interestingly, the positive influence of economic uncertainty on the shadow economy is likely exacerbated by Internet development. Lastly, analyses for several subsamples by time periods, income levels, and regions reveal additional findings. The negative impact of Internet usage on the shadow economy is consistent across income groups, regions, and time periods, except for a surprising positive impact in North America. The positive impact of economic uncertainty is also consistent in most income groups but more dominant in a period of low economic uncertainty. Interestingly, economic uncertainty is found to have a negative impact on the informal sector in low-income economies and Sub-Saharan Africa. Overall, the results have an important implication: Increases in economic uncertainty motivate economic agents to move to informal sectors, and this is supported by information technologies.