Determinants of the Shadow Economy in the Czech Regions: A Region-Level Study

Issue: 3/2017

Jakub Buček

Faculty of Economics and Administration, Masaryk University, Lipová 41a, Brno, Czech Republic,

This paper investigates the size and development of the shadow economy in the Czech Republic on the state-level base over the 2005-2014 period. The multiple indicators multiple causes (MIMIC) model is used to assess the estimation of the shadow economy size. I investigate how labour market, number of people with at least one distraint, and the burden of taxation might contribute to the existence of the shadow economy. While the former two are important determinants of the shadow economy, I find no evidence to prove any significant impact of distraints on the shadow economy size. As for the country’s particular regions, I find that those surrounding big cities, especially Prague, have, on average, a smaller shadow economy size, whereas regions in the borderlands (former Sudetenland) suffer from a larger shadow economy

DOI: 10.1515/revecp-2017-0016
JEL: O17, H26
Keywords: Tax Burden, Shadow Economy, Regions, MIMIC Model

ALLINGHAM, M. G., and A. SANDMO. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics. Vol. 1, pp. 323-338. DOI: 10.1016/0047-2727(72)90010-2

ANNICCHIARICO, B., and C. CESARONI. (2016). Tax Reforms and the Underground Economy: A Simulation-Based Analysis. CEIS Research Paper. Vol. 14, pp. 1-43.

ARGENTIERO, A., and C. A. BOLLINO. (2015). Uncovering Unobserved Economy: A General Equilibrium Characterization. Metroeconomica. Vol. 66, pp. 306–338. DOI: 10.1111/meca.12072

BUEHN, A. (2011). The Shadow Economy in German Regions: An Empirical Assessment. German Economic Review. Vol. 13, pp. 275-290. DOI: 10.1111/j.1468-0475.2011.00557.x

CHAUDHURI, K., F. SCHNEIDER, and S. CHATTOPADHYAY. (2006). The size and development of the shadow economy: An empirical investigation from states of India. Journal of Development Economics. Vol. 80, pp. 428-443. DOI: 10.1016/j.jdeveco.2005.02.011

ELGIN, C., and O. ÖZTUNALI. (2012). Shadow economy around the world: model based estimates. Working Papers. No. 2012/05, pp. 1-48.

FREY, B. S., and H. WECK-HANNEMAN. (1984). The hidden economy as an ‘unobserved’ variable. European Economic Review. Vol. 26, pp. 33-53. DOI: 10.1016/0014-2921(84)90020-5

FRIEDMAN, E., S. JOHNSON, D. KAUFMANN, and P. ZOIDO-LOBATON. (2000) Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics. Vol. 76, pp. 459-493.

HU, L., and P. M. BENTLER. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling: A Multidisciplinary Journal. Vol. 6, pp. 1-55. DOI: 10.1080/10705519909540118

JOHNSON, S., D. KAUFMANN, and P. ZOIDO-LOBATON. (1998) Regulatory Discretion and the Unofficial Economy. The American Economic Review. Vol. 88, No. 2, pp. 387-392.

KLEVEN, H. J., M. B. KNUDSEN, C. T. KREINER, and S. PEDERSEN. (2011). Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark. Econometrica. Vol. 79, pp. 651–692. DOI: 10.3982/ECTA9113

KUCERA, D., and L. RONCOLATO. (2008). Informal employment: Two contested policy issues. International Labour Review. Vol. 147, pp. 321–348. DOI: 10.1111/j.1564-913X.2008.00039.x

LACKO, M. (1999). Do Power Consumption Data Tell the Story? - Electricity Intensity and Hidden Economy in PostSocialist Countries. Budapest Working Papers on the Labour Market. No. 1999/2, pp. 1-31.

LEONARD, M. (1998). Invisible Work, Invisible Workers: The Informal Economy in Europe and the US. London: MacMillan Press. ISBN 978-0312217600.

ORSI, R., D. RAGGI, and F. TURINO. (2014). Size, trend, and policy implications of the underground economy. Review of Economic Dynamics. Vol. 17, pp. 417–436. DOI: 10.1016/

PAPPA, E., R. SAJEDI, and E. VELLA. (2015). Fiscal consolidation with tax evasion and corruption. 37th Annual NBER International Seminar on Macroeconomics. Vol. 96, pp. S56–S75. DOI: 10.1016/j.jinteco.2014.12.004

ROSSEEL, Y. (2012). Lavaan: An R Package for Structural Equation Modeling. Journal of Statistical Software. Vol. 48, pp. 1-36. DOI: 10.18637/jss.v048.i02

SCHNEIDER, F. (2000). The Increase of the size of the shadow economy of 18 OECD countries: Some preliminary explanations. CESifo Working Paper Series. No. 306, pp. 1-31.

SCHNEIDER, F. (2015). Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2015: Different Developments.

SCHNEIDER, F., and D. H. ENSTE. (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature. Vol. 38, pp. 77-114. DOI: 10.1257/jel.38.1.77

SCHNEIDER, F., and C. C. WILLIAMS. (2013). The Shadow Economy. London: The Institute of Economic Affairs. ISBN 978 0 255 36674 8.

TAFENAU, E., H. HERWARTZ, and F. SCHNEIDER. (2010). Regional Estimates of the Shadow Economy in Europe. International Economic Journal. Vol. 24, pp. 629-636. DOI: 10.1080/10168737.2010.526010

WISEMAN, T. (2013). US shadow economies: a state-level study. Constitutional Political Economy. Vol. 24, pp. 310–335. DOI: 10.1007/s10602-013-9146-7