Corruption and the Shadow Economy: A Structural Equation Model Approach
by Andreas Buehn, Friedrich Schneider
(May 2009)

The relationship between corruption and the shadow economy is not clear. Theoretically, they either substitute or complement each other exhibiting either a negative or positive relationship. This paper using a structural equation model with two latent variables extracts information on various dimensions of corruption and the shadow economy to contribute to the debate on their relationship. It presents empirical evidence of a positive relationship between the shadow economy and corruption. The results show that the shadow economy influences corruption more than corruption influences the shadow economy.
Text: See Discussion Paper No. 4182