Crime and shadow economic activities are a fact of life around the world, and almost all societies engage in trying to control these activities through education, punishment, or prosecution. Gathering statistics about who is active in the shadow economy activities, the frequency with which underground activities occur and the magnitude of these activities is crucial for making effective and efficient decisions regarding allocating resources in this area. Obviously it is difficult to get accurate information about underground or shadow economy activities because individuals engaged in these activities wish to remain unidentified. Hence, estimation of shadow economy activities can be considered a scientific passion for knowing the unknowable.
The attempts at measurement are obviously problematic,2 since shadow economy activities are performed in such a way as to avoid any official detection. Moreover, if you ask an academic, a public sector specialist, a policy or economic analyst, or a politician, what is going on in the shadow economy, and even just how big it is, you will get a wide range of answers.3 In spite of this, there is growing concern over the phenomenon of shadow economy, and there are several important reasons why politicians and public sector workers should be especially worried about its rise and growth.
This chapter is a revised and updated version of an essay that first appeared in The Encyclopedia of Public Choice edited by Charles K. Rowley and Friedrich Schneider and published in 2004 by Kluwer Academic Publishers, Volume I, 286–296.
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Schneider, F. (2008). Shadow Economy. In: Readings in Public Choice and Constitutional Political Economy. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-75870-1_28
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