Shadow economy and income inequality: new empirical evidence from Asian developing countries

This paper examines the impact of shadow economy on income inequality by using a panel data set of 19 Asian countries in the period 1990-2015. In contrast to previous studies, the results from estimations of fixed effect, random effect, and SGMM surprisingly show that the shadow economy reduces income inequality in the research region. Specifically, the shadow economy significantly increases the income share held by lowest quintile and decreases the income share held by highest quintile. The result can be explained by combining the three schools of thought on informal economy including Dualism, Legalism, and Volutarism. The finding contributes to the idea that the shadow economy is not always bad, especially to the poor, out of its negative effects. Therefore, policies to deal with the shadow economy should take the poor into close consideration with other simultaneous solutions for poverty eradication and income inequality reduction in developing countries.