Investigating the impact of political risk on the shadow economy: A quantile panel approach

The purpose of this article is to investigate the impact of political risk on the shadow economy. To this end, using data from 52 developing countries and 38 developed countries, it investigated the effect of political risk on the size of the underground economy over the period 2000-2020. In this study, the quantize panel approach was used separately for two groups of developed and developing countries to estimate the research model. The results show that political risk had a positive and significant effect on the size of the underground economy in all decades and in both developed and developing country groups. This means that countries facing higher political risks have a more hidden and informal economy. Also, the results of this research show that the unemployment rates, abundance of natural resources and taxes have a positive effect on the size of the shadow economy, but the quality of regulations and economic freedom significantly reduce the size of the shadow economy in both groups of countries. Based on the results, reducing political risks, improving government regulations in support of the private sector, improving business and trade freedom, financial and operational transparency in the exploitation of natural resources, as well as creating jobs and improving the business environment are policy recommendations of this study.