The shadow economy as a higher order construct inside European governance

Purpose – Several dimensions of public governance occur while approaching the Shadow Economy (SE) phenomenon. The purpose of this paper is to study the SE by means of the European governance analysis by highlighting the main features of implications of the policy options. A statistical significance on the nexus between public governance and the SE appears with respect to the indicators taken into consideration except for the dimensions related to the tax system, which appear to be moderate in magnitude in terms of their effects. Design/methodology/approach – In order to evaluate data from 32 European Union countries during 2011, a hierarchical component model (HCM) in the context of the structural equation model (SEM) partial least squares (PLS) is utilised. Two different procedures are considered: a two-stage approach (TSA) and the repeated indicators approach (RIA). Findings – The two procedures (RIA and TSA) proposed in the model have about the same impact on the SE. Evidence suggests that the manifest variables joined to the regulatory system, business regulation and wealth level significantly affect the SE. In contrast, different dimensions connected to the tax system need to be considered to avoid that there be no significant effects on the SE from taxes. Research limitations/implications – A critical evaluation of the policy implications of the results are included, by focusing on the effects on the SE. Practical implications – This paper suggests where more emphasis should be placed when referring to the statistical results in dealing with the SE. Originality/value – To the authors’ knowledge, this is the first attempt to explore the SE while using an HCM (also known as higher order model) performed in a SEM-PLS procedure. The model proposed discerns the relevance and the marginal impact of several dimensions of policy interventions.