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Business & Economics

INSTITUTIONAL DETERMINANTS OF SHADOW ECONOMY IN EU COUNTRIES: A PANEL DATA ANALYSIS
Andreea-Oana Iacobuta, Oana Ramona Socoliuc, Raluca Irina Clipa

ABSTRACT.The aim of this paper is to identify the institutional factors that determine shadow economy European Union level and to group the member states into clusters using shadow economy and the institutional factors as variables. Shadow economy, a serious enemy of economic development, with unknown dimensions and unpredicted evolution, does not develop in a vacuum but in an institutional framework which has a significant role in explaining its dimensions. The research methods used in this paper are panel data analysis and cluster analysis. The results point out that the level of shadow economy is lower in countries with higher government effectiveness, regulatory quality, business freedom, fiscal freedom and labour freedom. Regulatory quality, government effectiveness and shadow economy were the most important variables in dividing EU countries into three main clusters. The main conclusion is that in order to diminish the level of shadow economy we have to increase institutional efficiency .

KEYWORDS: shadow economy, institutions, economic freedom, panel data analysis, EU countries.

JEL classification: C33, C38, O17, O57.