Corruption and the shadow economy: One‐way or two‐way street?

This paper attempts to bring some resolution to the relation between corruption and the shadow economy. While previous research focuses on the static relationship between the two, we account for dynamics using a panel vector autoregression model and consider influences from the official economy and institutional quality. Using cross‐national panel data for 108 countries over the period 1984–2006, results show a bidirectional relationship with initial complementarity, and substitution over time. Thus, the nature of the two‐way street is shown to change over time and our consideration of dynamics reveals the complementarity–substitution switch