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Using crosscountry panel data we examine the evolution of the informal economy through the course of economic development by particularly taking its relationship with institutions into account. We borrow from the informal economy estimates constructed by Elgin and Oztunali (2012) for 141 countries over the period from 1984 to 2009 and using panel data estimation techniques we investigate the relationship between informal economy and the level of economic development, proxied by GDP per-capita. Our findings suggest that institutional quality strongly interacts with the relationship between economic development and size of the informal economy. Specifically, we find that a higher GDP percapita is associated with a larger informal sector size in countries where the institutional quality is low. The opposite is true in countries with good institutions. These results are also in line with a two-sector dynamic general equilibrium model of the informal economy.

This study investigates various economic factors' impact in determining the relationship between functional income distribution and aggregate demand from both a theoretical and an empirical viewpoint. Inspired by Bhaduri and Marglin (1990), we base our analysis on a demand-driven growth model for an open economy that allows for either profit-led or wageled regimes. Our results strongly indicate that a higher level of trade openness is associated with a lower probability of being wage-led. We find evidence that lower wage inequality makes an economy more wage-led and that countries with a greater private credit-to-GDP ratio are more likely to be profit-led.

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In this study we investigate the empirical relationship between the size of the informal sector (as percentage of official GDP), carbon dioxide and sulfur dioxide emissions in Turkey by using annual data from 1950 to 2009 and conducting a time-series analysis using cointegration techniques. This analysis is crucial as pollution emissions may lead to unfavorable weather conditions and potentially cause environmental impacts that may adversely affect the global economy. The empirical analysis shows evidence towards the existence of an inverted-U relationship between relative informal sector size and environmental pollution indicators in the long-run. That is small and large sizes of the shadow economy are associated with little environmental pollution and medium levels of the size of the shadow economy are associated with higher levels of environmental pollution. Moreover, using multivariate cointegration techniques, we suggest and test an economic mechanism to account for this observation. This also helps us to prescribe various policy recommendations regarding pollution and energy use.