Shadow Economy and Income Inequality in Iran

This paper studies the relationship between income inequality and shadow economy in Iranian economy during 1971-2010. After examining the structural break of the data by using Bai- Peron endogenous structural break test, and Lee- Strazicich unit root test, the study will be done by using Ordinary Least Squares. Based on the results obtained, the effect of shadow economy on income inequality is positive and by the increase of shadow economy, income inequality will be increased. Also, the results indicate that the increase of government size leads to the increase of the income inequality. In addition, the simultaneous effect of the shadow economy, economic growth and government size represent that a rise of shadow economy will increase income inequality.