Handbook on the Shadow Economy
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Handbook on the Shadow Economy

Edited by Friedrich Schneider

The shadow economy (also known as the black or underground economy) covers a vast array of trade, goods and services that are not part of the official economy of a country. This original and comprehensive Handbook presents the latest research on the size and development of the shadow economy, which remains an integral component of the economies of most developing and many developed countries.
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Chapter 3: The Size and Development of the Shadow Economy in India: A First Attempt at a Public Choice Explanation

Kausik Chaudhuri and Friedrich Schneider


Kausik Chaudhuri and Friedrich Schneider 3.1 INTRODUCTION The gap between the observable and the actual has for long been the anathema of social scientists. Over the years this has led to the conceptualization of the ‘hidden economy’. Black, shadow, underground, unobserved, unofficial, subterranean, unrecorded, informal, irregular, second, twilight, parallel – synonyms used for the ‘hidden economy’ seem to highlight the fact that this concept essentially captures the activities beyond measurement by fiscal or economic factors.1 The hidden economy basically consists of legal and illegal activities outside the reach of the government.2 Studies show that underground activities have been on the rise since the 1970s when the presence of government activity became stronger in economies around the world. With an increase in tax rates to finance larger public spending programmes, the desire to escape taxes and regulatory restrictions also gained in prominence (Tanzi and Schuknecht, 1997). The increasing size of the underground economy has received significant media attention in recent past. Such media attention brought the nexus of the black economy into the public glare creating a consciousness about the gravity of the phenomenon all over the world. In this chapter, we deal with two questions: (1) we provide a detailed estimate of the size of the hidden economy in India using a Multiple Indicator Multiple Cause (MIMIC) model and (2) we provide a first attempt to demonstrate the role of the print media, elections and types of government in determining the growth of the size of the hidden economy using data...

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