The devil is in the shadow. Do institutions affect income and productivity or only official income and official productivity?

This paper assesses the relationship between institutions, output, and productivity when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total (“corrected”) factor productivity becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness.

[1]  Andreas Knabe,et al.  Subsidizing Extra Jobs: Promoting Employment by Taming the Unions , 2007 .

[2]  L. Weill,et al.  Does financial intermediation matter for macroeconomic efficiency , 2006 .

[3]  Andreas Irmen,et al.  Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model , 2007 .

[4]  E. Mamatzakis.  An Analysis of the Impact of Public Infrastructure on Productivity Performance of Mexican Industry , 2007 .

[5]  L. Pritchett.  The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital , 1999 .

[6]  Aamer S. Abu-Qarn,et al.  Getting Income Shares Right , 2009 .

[7]  A. Grover.  International Outsourcing and the Supply Side Productivity Determinants , 2007 .

[8]  Doina Radulescu.  From Separate Accounting to Formula Apportionment: Analysis in a Dynamic Framework , 2007, SSRN Electronic Journal.

[9]  F. Rycx,et al.  Wage differentials in Belgium: the role of worker and employer characteristics , 2007 .

[10]  Simon Johnson,et al.  Corruption, Public Finances, and the Unofficial Economy , 1999 .

[11]  C. Keuschnigg.  Exports, foreign direct investment, and the costs of corporate taxation , 2008 .

[12]  J. Lambsdorff.  How Corruption Affects Productivity , 2003 .

[13]  F. Rycx,et al.  Women and Competition in Elimination Tournaments: Evidence from Professional Tennis Data , 2005, SSRN Electronic Journal.

[14]  J. de Haan,et al.  Measuring Synchronicity and Co-Movement of Business Cycles with an Application to the Euro Area , 2007, SSRN Electronic Journal.

[15]  Stephen F. Knack,et al.  INSTITUTIONS AND ECONOMIC PERFORMANCE: CROSS‐COUNTRY TESTS USING ALTERNATIVE INSTITUTIONAL MEASURES , 1995 .

[16]  J. de Haan,et al.  The Importance of Being Vigilant: Has ECB Communication Influenced Euro Area Inflation Expectations? , 2007, SSRN Electronic Journal.

[17]  M. Kolmar,et al.  Tax Competition with Formula Apportionment: The Interaction between Tax Base and Sharing Mechanism , 2007, SSRN Electronic Journal.

[18]  A. Szafarz.  Hiring People-Like-Yourself: A Representation of Discrimination on the Job Market , 2007 .

[19]  Michele Cincera,et al.  EU Pre-Competitive and Near-the-Market S&T Collaborations , 2007 .

[20]  J. Stock,et al.  Instrumental Variables Regression with Weak Instruments , 1994 .

[21]  Carl‐Johan Dalgaard,et al.  Accounting for Productivity: Is it Ok to Assume that the World is Cobb-Douglas? , 2008 .

[22]  H. Ursprung,et al.  Life Cycle and Cohort Productivity in Economic Research: The Case of Germany , 2007, SSRN Electronic Journal.

[23]  A. Alesina,et al.  Fractionalization , 2002 .

[24]  Olga Bourachnikova.  Weighting Function in the Behavioral Portfolio Theory , 2007 .

[25]  S. Vollmer,et al.  Competitiveness: A comparison of China and Mexico , 2007 .

[26]  Daniel A. Kaufmann,et al.  Governance Matters III: Governance Indicators for 1996, 1998, 2000, and 2002 , 2004 .

[27]  D. North,et al.  Economic performance through time , 2012 .

[28]  Panu Poutvaara.  The Expansion of Higher Education and Time-Consistent Taxation , 2007, SSRN Electronic Journal.

[29]  Michael Binder,et al.  International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis , 2007, SSRN Electronic Journal.

[30]  Simon Johnson,et al.  Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries , 1999 .

[31]  Norimichi Matsueda,et al.  HOW COMMITTEES REDUCE THE VOLATILITY OF POLICY RATES , 2007 .

[32]  J. Leschke.  Are unemployment insurance systems in Europe adapting to new risks arising from non-standard employment? , 2007 .

[33]  J. Issler,et al.  Testing production functions used in empirical growth studies , 2004 .

[34]  Edward C. Prescott,et al.  Needed: a theory of total factor productivity , 1998 .

[35]  Kai A. Konrad.  Mobile tax base as a global common , 2007, SSRN Electronic Journal.

[36]  C. Bjørnskov.  The multiple facets of social capital , 2006 .

[37]  K. Gërxhani,et al.  Tax evasion in transition : outcome of an institutional clash? - Testing Feige's conjecture , 2004 .

[38]  G. Caporale,et al.  Income and Happiness Across Europe: Do Reference Values Matter? , 2007, SSRN Electronic Journal.

[39]  Aamer S. Abu-Qarn,et al.  Getting Income Shares Right , 2009 .

[40]  D. Dollar,et al.  Institutions, Trade, and Growth , 2022 .

[41]  R. Kneller,et al.  The specification of the aggregate production function in the presence of inefficiency , 2003 .

[42]  A. Ichino,et al.  Too Old to Work, Too Young to Retire? , 2007, SSRN Electronic Journal.

[43]  James A. Robinson,et al.  The Colonial Origins of Comparative Development: An Empirical Investigation , 2000 .

[44]  F. Rycx,et al.  Industry Wage Differentials, Unobserved Ability, and Rent-Sharing: Evidence from Matched Worker-Firm Data, 1995-2002 , 2006 .

[45]  Michael Svarer,et al.  Flexicurity : labour market performance in Denmark , 2007 .

[46]  Norimichi Matsueda,et al.  How committees impact the volatility of policy rates , 2009 .

[47]  Simon Johnson,et al.  The Unofficial Economy in Transition , 1997 .

[48]  A. Cigno,et al.  A Theoretical Analysis of the Effects of Legislation on Marriage, Fertility, Domestic Division of Labour, and the Education of Children , 2007 .

[49]  L. Weill,et al.  Does better governance foster efficiency? An aggregate frontier analysis , 2005 .

[50]  Abhinay Muthoo,et al.  Corruption, extortion and evasion , 1999 .

[51]  V. Tanzi.  Uses and Abuses of Estimates of the Underground Economy , 1999 .

[52]  Ben Lockwood,et al.  Does Tax Competition Really Promote Growth? , 2007, SSRN Electronic Journal.

[53]  J. Guyot,et al.  Capital humain et processus de création d'entreprise: le cas des primo-créateurs wallons , 2006 .

[54]  M. Beine,et al.  Intervention Policy of the Boj: A Unified Approach , 2007, SSRN Electronic Journal.

[55]  M. Olson,et al.  Governance and Growth: A Simple Hypothesis Explaining Cross-Country Differences in Productivity Growth , 2000 .

[56]  R. King.  Capital fundamentalism, economic development, and economic growth , 1994 .

[57]  Hikaru Ogawa,et al.  Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking , 2007 .

[58]  J. Fidrmuc,et al.  Volatility of Exchange Rates in Selected New EU Members: Evidence from Daily Data , 2007, SSRN Electronic Journal.

[59]  C. Barros,et al.  Identification of Segments of European Banks with a Latent Class Frontier Model , 2007 .

[60]  Damien Sheehan-Connor,et al.  One Chance in a Million: Altruism and the Bone Marrow Registry , 2007, The American economic review.

[61]  R. Beetsma,et al.  Pension Systems, Ageing and the Stability and Growth Pact , 2007 .

[62]  James A. Robinson,et al.  Institutions as a Fundamental Cause of Long-Run Growth , 2005 .

[63]  A. Dreher,et al.  Corruption and the shadow economy: an empirical analysis , 2006, SSRN Electronic Journal.

[64]  鳥居 泰彦,et al.  世界経済・社会統計 = World development indicators , 1998 .

[65]  F. Rycx,et al.  The Part-Time Wage Penalty in European Countries: How Large is it for Men? , 2007, SSRN Electronic Journal.

[66]  Trond E. Olsen,et al.  The Rise of Individual Performance Pay , 2007, SSRN Electronic Journal.

[67]  G. Citoni,et al.  Are Bruxellois and Walloons more optimistic about their health , 2007 .

[68]  Richard Paap,et al.  The Trade and FDI Effects of EMU Enlargement , 2007, SSRN Electronic Journal.

[69]  Tobias Seidel,et al.  Intra-Regional Tax Competition and Economic Geography , 2007, SSRN Electronic Journal.

[70]  Aamer S. Abu-Qarn,et al.  Sources of Growth Revisited: Evidence From Selected MENA Countries , 2007 .

[71]  C. Gerschlager.  Adam Smith's account of self-deceit and informal institutions , 2007 .

[72]  W. Richter.  Efficient Tax Policy Ranks Education Higher than Saving , 2007 .

[73]  F. Rycx,et al.  Establishment Size and the Dispersion of Wages: Evidence from European Countries , 2005, SSRN Electronic Journal.

[74]  F. Rycx,et al.  The wage penalty induced by part-time work: the case of Belgium , 2005 .

[75]  R. Barro,et al.  International Data on Educational Attainment Updates and Implications , 2000 .

[76]  Khalid Sekkat,et al.  The tradeoff between efficiency and macroeconomic stabilization in Europe , 2005 .

[77]  F. Schneider,et al.  Shadow Economies and Corruption All Over the World: Revised Estimates for 120 Countries , 2007 .

[78]  Khalid Sekkat,et al.  Institutional Changes Now and Benefits Tomorrow: How Soon is Tomorrow? , 2009 .

[79]  Oliver Falck.  Heavyweights - The Impact of Large Businesses on Productivity Growth , 2007, SSRN Electronic Journal.

[80]  F. Rycx,et al.  Women and Competition in Elimination Tournaments , 2005 .

[81]  Bennet A. Zelner,et al.  Published in: (2000) Economics and Politics 12(1):1-31 The Institutional Environment for Economic Growth , 2022 .

[82]  J. Gnabo,et al.  Talks, Financial Operations or Both? Generalizing Central Banks' FX Reaction Functions , 2007 .

[83]  A. Szafarz,et al.  Sector diversification during crises: a European perspective , 2006 .

[84]  Katrin Assenmacher,et al.  Assessing Forecast Uncertainties in a VECX Model for Switzerland: An Exercise in Forecast Combination Across Models and Observation Windows , 2007 .

[85]  Stefan Voigt,et al.  The economic effects of direct democracy—a first global assessment , 2007 .

[86]  F. Rycx,et al.  Wages and the Bargaining Regime under Multi-level Bargaining: Belgium, Denmark and Spain , 2006, SSRN Electronic Journal.

[87]  Peter J. Klenow,et al.  The Neoclassical Revival in Growth Economics: Has It Gone Too Far? , 1997, NBER Macroeconomics Annual.

[88]  Emmanuel Saez,et al.  The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem , 2007, SSRN Electronic Journal.

[89]  S. Wolter,et al.  Are the Elderly a Threat to Educational Expenditures? , 2007, SSRN Electronic Journal.

[90]  D. Treutlein.  What Actually Happens to EU Directives in the Member States? A Cross-Country Cross-Sector View on National Transposition Instruments , 2007 .

[91]  Pierre-Guillaume Méon,et al.  The impact of European integration on the nineties' wave of mergers and acquisitions , 2006 .

[92]  Steven Ongena,et al.  Rules versus Discretion in Loan Rate Setting , 2007 .

[93]  M. Runkel,et al.  Tax Evasion and Competition , 2007, SSRN Electronic Journal.

[94]  G. Schnabl,et al.  Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View , 2007 .

[95]  Khalid Sekkat,et al.  Trade and Foreign Exchange Liberalization, Investment Climate, and FDI in the MENA Countries , 2023, SSRN Electronic Journal.

[96]  R. Plasman,et al.  La régionalisation de la négociation salariale en Belgique: vraie nécessité ou faux débat , 2007 .

[97]  Elisa Tosetti,et al.  Large Panels with Common Factors and Spatial Correlations , 2007, SSRN Electronic Journal.

[98]  Ariane Chapelle,et al.  Controlling Firms Through the Majority Voting Rule , 2005 .

[99]  B. Bosworth,et al.  Economic Growth in East Asia: Accumulation versus Assimilation , 1996 .

[100]  Jonathan M. Thomas,et al.  Limited Commitment Models of the Labor Market , 2007, SSRN Electronic Journal.

[101]  F. Schneider.  Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries , 2007 .

[102]  Mark Gradstein,et al.  What Causes Firms to Hide Output?: The Determinants of Informality , 2005, SSRN Electronic Journal.

[103]  C. I. Jones,et al.  Why Do Some Countries Produce so Much More Output Per Worker than Others? , 1998 .

[104]  Albert O. Hirschman,et al.  Exit, Voice, and Loyalty , 1970 .

[105]  Mark Gradstein,et al.  Inequality and Informality , 2006 .

[106]  Oliver Falck,et al.  Demography and Innovative Entrepreneurship , 2007 .

[107]  Pierre-Guillaume Méon,et al.  Monetary policy in the presence of asymmetric wage indexation July 2005 , 2005 .

[108]  A. Dreher,et al.  The devil is in the shadow. Do institutions affect income and productivity or only official income and official productivity? , 2007, Public Choice.

[109]  Simon Johnson,et al.  Regulatory Discretion and the Unofficial Economy , 2008 .

[110]  Silvia Console Battilana,et al.  Uncovered Power: External Agenda Setting, Sophisticated Voting, and Transnational Lobbying , 2007 .

[111]  A. Brunetti,et al.  Investment and institutional uncertainty: A comparative study of different uncertainty measures , 1997 .

[112]  F. Schneider,et al.  Shadow Economies: Size, Causes, and Consequences , 2000 .

[113]  S. Carson.  Slave Prices, Geography and Insolation in 19th Century African-American Stature , 2007, SSRN Electronic Journal.

[114]  Norman V. Loayza,et al.  The Economics of the Informal Sector: A Simple Model and Some Empirical Evidence from Latin America , 1996 .

[115]  K. Gërxhani.  Informal Sector in Developed and less Developed Countries: A Literature Survey , 1999 .

[116]  Ben Lockwood.  Voting, Lobbying, and the Decentralization Theorem , 2007, SSRN Electronic Journal.

[117]  Friedrich Schneider,et al.  Shadow economies around the world: what do we really know? , 2005 .

[118]  D. Audretsch,et al.  It's All in Marshall: The Impact of External Economies on Regional Dynamics , 2007, SSRN Electronic Journal.

[119]  Abdelhak S. Senhadji.  Sources of Economic Growth: An Extensive Growth Accounting Exercise , 1999, SSRN Electronic Journal.