Corruption and the Shadow Economy: A Structural Equation Model Approach

Abstract

The relationship between corruption and the shadow economy is not clear. Theoretically, they either substitute or complement each other - exhibiting either a negative or positive relationship. This paper - using a structural equation model with two latent variables - extracts information on various dimensions of corruption and the shadow economy to contribute to the debate on their relationship. It presents empirical evidence of a positive relationship between the shadow economy and corruption. The results show that the shadow economy influences corruption more than corruption influences the shadow economy.

Keywords: shadow economy, corruption, SEM models

JEL Classification: O17, O5, D78, H11, H26