Corruption, institutional quality and shadow economy in Asian countries

Abstract

This study analyzes the effects of corruption and institutional quality on shadow economy to test the hypothesis of greasing and sanding the wheels of corruption. After empirically studying 29 Asian countries, our results indicate that corruption and institutional quality have a positive and negative impact on shadow economy, respectively. Furthermore, the interaction of corruption and economic freedom has a negative impact on shadow economy, whereas corruption and democracy have a positive impact on shadow economy, confirming that corruption works better to ‘grease of the wheels’ in weak economic institutions conditions and in strong political institutions conditions.