U.S. Shadow Economies, Corruption, and Entrepreneurship : State-Level Spatial Relations

This paper offers a new theory of the corruption-shadow economy relationship: one that defines it as either collusive – i.e., crony – or non-collusive. Using new estimates of state-level shadow economy size, and data on corruption convictions of U.S. public officials for the 48 contiguous states, I revisit this relationship empirically, controlling for spatial dependence. Additionally, I investigate the relationship between entrepreneurship and cronyism using productive entrepreneurship scores from Wiseman and Young (2014). Findings suggest that corruption and shadow economy size are positively related, and both contagious and cross-contagious in the U.S. states. These results are fairly robust to several methods of spatial modeling. New to this study, I also find that productive entrepreneurship is contagious across states. I attempt to draw the link between formal sector entrepreneurial outcomes, corruption, and the shadow economy using spatial GMM/IV modeling in an entrepreneurship regression