Institutional frameworks and the shadow economy: new evidence of colonial history, socialist history, religion, and legal systems

Abstract

This study endeavours to expand our knowledge on the role of colonial history, socialist history, religion, and legal systems in explaining the size of the shadow economy across countries. Empirical analysis is carried out for a global sample of 148 countries from 2002 to 2017. Besides formal institutional quality, four other factors of institutions such as colonial history, dominant religion, socialist or socialist history, and origin of the legal system. First, formal institutions are reaffirmed as important factors in reducing the shadow economy. Second, colonial history, socialist history, religion, and legal systems are found to be critical in explaining persistent differences in the size of the shadow economy between countries. Specifically, after controlling for key determinants of the shadow economy, countries with one dominant religion, socialist history, mixed legal system, or common law system appear to have higher levels of shadow economy. In contrast, countries with a colonial history or civil law system seem to have lower levels. Third, there are some heteroscedastic effects of other determinants on the shadow economy in colonial history, socialist history, religion and legal systems. Last, the role of colonial history, socialist history, religion, and legal systems in clarifying the size of the shadow economy seems to be heteroscedastic across seven regions.