In this paper, we analyse the main determinants of the shadow economy and the existing relationships. The main objectives are addressed through a rigorous analysis of literature combined with a bibliometric analysis to support the claims and to capture gaps in literature, followed by a practical approach using spatial panel models. We offer a good understanding of the phenomenon by including factors with ambiguous impact, moving from a general to a more specific perspective.
In the first step, we created two maps with bibliographic data and text data analysis, using a set of 2087 articles assessed in VOSviewer, to support the systematic review of literature. To capture spillover effects, we applied the Spatial Durbin Model on a panel of the 27 EU countries for the period 2013–2022. Additionally, we account for local spatial patterns in the shadow economy by constructing the LISA clusters for the first and last years of analysis.
Our results show that tax revenue, population growth, regulatory quality and economic growth negatively impact the shadow economy, while unemployment has a positive impact. Taxpayers’ compliance is a key issue, which is why the levels of tax revenue and regulatory quality in neighbouring countries exert a spillover effect, influencing the level of shadow economy in a given country. In 2013, values were more evenly spread across Western and Northern Europe, but by 2022, these regions showed a decline in shadow economy intensity, possibly also explained by labour migration in these regions.
The study provides evidence about the two most important factors that determine the level of shadow economy, namely the rule of law and economic development of a country.
Knowing the determining factors of the shadow economy is of high importance for policymakers in order to make proper decisions to reduce the size of the shadow economy.
Reducing shadow economy conduct leads to an increase in economic development and general well-being of the society.
The originality of this work is the integration of the spatial approach in a little explored thematic context, providing in finding clear evidence that among potential factors on shadow economy, tax revenue and regulatory quality are found to be the most important ones.
