The impact of banking development on the size of shadow economies

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to examine the relationship between banking development and the size of shadow economies by employing data on 137 countries over the period from 1995 to 2007. Both cross-sectional and panel analysis suggest that an improvement in the development of the banking sector is associated with a smaller shadow economy. In addition, the authors find that both the depth and the efficiency of the banking sector matter in reducing the size of shadow economies. These results are robust to a variety of specifications that address multi-colinearity and endogeneity issues. Design/methodology/approach -Empirical cross-section and panel analysis were undertaken. Findings -The authors find that both the depth and the efficiency of the banking sector matter in reducing the size of shadow economies. Originality/value -This paper is original. Existing literature has identified a number of factors (e.g. the burden of taxation or regulation, the quality of government, legal enforcement, corruption, etc.) that create such incentives. In this paper the authors highlight another factor -the level of banking development -as a determinant of the shadow economy.

Tax evasion, financial development and inflation: Theory and empirical evidence

“…The main implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development. Thus, as with the empirical observation made by Bose et al (2012), the paper shows that the lower is the stage of such development, the higher is the incidence of tax evasion and the greater is the size of the underground economy. Furthermore, Gupta and Ziramba (2010) using an overlapping generations (OLG) monetary endogenous growth model, whereby government transfers affect young-age income, show that inflation -besides the usual suspects like fiscal policy (DablaNorris and Feltenstein, 2005), penaly rates (Schneider, 1994), probability of being detected (Schneider and Enste, 2000) and degree of corruption (Cerqueti and Coppier, 2011) -affect the degree of tax evasion.…”

“…Onnis and Tirelli (2011) argue that public expenditures decrease the size of the shadow economy, while Cerqueti and Coppier (2011) show how corruption affects the shadow economy. Most recently, Alm (2012) states that higher tax audit rates may reduce the size of the shadow economy and lastly Bose et al (2012) provides evidence that it is the level of financial development that determines the size of the shadow economy.…”

“…Although this measure is not only restricted to the bank's monitoring cost parameter, as denoted by c in (23) of the theoretical model, by definition it includes c and is proposed here as a rational proxy for c in the absence of a more direct and widely available measure of c. This cost measure is also an indication of the efficiency with which commercial banks matches surplus units to deficit units in the economy, and is available from the Financial Structure dataset compiled and updated by Beck and Demirgüç-Kunt (2009). Barth, Caprio and Levine (2002) and Bose et al (2012) have used Bnkcost as a measure of the inefficiencies in the banking sector.…”

“…All three these variables are compiled as indices, with higher values of the index corresponding to better governance and a lower tax burden, respectively. These variables are commonly used in the shadow economy literature as important indicators of the policy, institutional and regulatory environment which impacts on the size of the shadow economy observed in countries (Schneider, 2007;Bose et al 2012). Data on both Regquality and Ruleof law is from the World Governance Indicators (WGI) dataset maintained by the World Bank and covers the period 1996-2009, and Fiscfreed is found in the Index of Economic Freedom dataset compiled by The Heritage Foundation and covers the period 1995-2009.…”

“…-Victor Hugo 1 Recent empirical evidence provided by Bose, Capasso and Wurm (2012) show that an improvement in the development of the banking sector is associated with a smaller shadow economy. The findings of Bose et al (2012) corroborate indicative theoretical results reported by Blackburn, Bose and Capasso (2010) that a less-developed financial sector corresponds to the observance of a bigger shadow economy. Blackburn et al (2010) studied the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation.…”