Staying in the shadow or not? Remittances and the Shadow Economy

Abstract Objective This study investigates the impact of remittances on the shadow economy and how domestic institutions, particularly property rights, moderate this relationship. Methods We employed a quantitative research method using panel data from developing countries from 1990 to 2018. We adopted both fixed‐effects and instrumental variable approaches to address possible endogeneity concerns between remittances and the shadow economy. Results The results demonstrate that remittances are positively associated with the shadow economy's size. However, this positive effect is weaker in countries with strong property rights institutions. These findings remain robust across alternative measures of key variables and estimation techniques. Conclusion The results suggest that foreign income in the form of remittances is an important determinant of the shadow economy in recipient countries. We believe that exploring the relationship between foreign sources of income and the decisions of economic actors to enter specific sectors warrants further investigation.