Analyzing How a Growth in Energy Prices Impact on the Size of the Shadow Economies Around the World

Nikita Suslov (Novosibirsk State University)
Ekaterina Meltenisova (Novosibirsk State University)

Abstract: We assume that a growth of energy prices could create additional incentives for firms to conceal their incomes that results in the higher size of the shadow economy in a country. To verify this hypothesis we apply a formal analysis of the model where a representative firm attempts to ‘op-timize’ its concealed income in the context of a non-rigid outside control. We show that institu-tional improvements would allow the lower SE share in GDP. To test this hypothesis empirically, we construct regressions of the shares of the shadow economy in GDP over 2003-2008 using the estimations both available in the publications and ours calculated by Currency Demand Approach which we modified and applied, unlike the previous modifications, to cross-sectional data. A specific interaction variable used in our regression equations, being a combination of both tax burden variable and institutional quality indicator, allows considering an important fact that the high level of taxes assumes the shadow economy bigger in size in the counties with poor in-stitutional environment and vice versa – in those with sound environment due to a high supply of public goods and services. To calibrate the model, we applied the algorithm which allows con-sidering the fact that foreign currency (US dollars in our case) along with domestic one is in-cluded in the shadow economy’s transactions. Finally, the hypothesis suggested by us concerning the impact of relative energy prices on the size of the shadow economy in a country was verified on the basis of large samples of both cross-sectional and panel data. The estimations of the regression parameters which we obtained can demonstrate a stable character of their values de-spite the methods we applied to in our analysis.

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