Social Capital and the Shadow Economy

An inverse relation arises, in a cross-country sample. Using several instruments, and especially a linguistic rule, we overcome endogeneity concerns and try to establish a causal relation arising from trust.

Findings (1) suggest a 1 percentage point increase in trust (the share of trusting population) reduces the shadow economy by almost half a percentage point of GDP, (2) indicate a decreasing marginal effect of trust over the shadow economy. Overall, (3) these results further motivate low-medium trust countries to invest in policies aiming at increasing trust