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The shadow economy is a multifaceted phenomena with many roots and consequences. The European Commission defines it as the unobserved part of the economy, which includes: (1) illegal activities in which the parties are willing participants in economic transactions, (2) hidden and underground activities in which the transactions are legal but are not reported to avoid official scrutiny, and (3) informal activities in which no records are kept. According to this definition, the shadow economy may be approximated by unreported transactions done by unregistered and registered companies.
This paper presents the impact of cashless payments on the size of the shadow economy. The empirical analysis of 57 countries over the period 2010-2015 shows a strong and persistent correlation between the size of the shadow economy and electronic payments volume. We specified the importance of the debit and credit card transactions as a main interested variable along with the GDP per capita, tax compliance, unemployment, agriculture production share in GDP as controlling variables, and the significant reducing effect of digital payment methods and size the informal economy.
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