Journal of Econometric Modelling

Journal of Econometric Modelling

An Empirical Analysis of the Causes and Trends of the Shadow Economy in Iran’s provinces (New evidence with a structural equations approach)

Document Type : Original Article

Authors
Seyyedeh Neda Rahimi 1
Majid Maddah 2
Mahboobeh Farahati 3
1 Ph.D. Student in Economcs, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Semnan , Iran
2 Professor of Economics, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran
3 Associate Professor of Economics, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan , Iran
10.22075/jem.2025.38442.2024
Abstract
The shadow economy is a part of the economic activities of countries, the growth of which is accompanied by the expansion of illegal activities, the reduction of government revenues, and political and social instability. This paper examines the causes and consequences of the shadow economy in the provinces of Iran during the years 2000-2022 using the Multiple Causes - Multiple Indicators (MIMIC) model. The results from the model estimation show that, first, tax burden, unemployment rate, inflation rate, government size, budget deficit and per capita income have a significant effect on the growth of the shadow economy. Second, the trend of the shadow economy in Iran’s provinces, especially in recent years, is upward. These results indicate that government performance at the macro level and prevailing economic conditions in society affect the shadow economy at the local economic level. Therefore, reforming government policies and reducing the size of the government with the aim of strengthening local economies can be effective in controlling its size.         
Keywords
Shadow economy
Multiple Causes - Multiple Indicators Model (MIMIC)
Structural Equations
Iran’s provinces