Determinants of the Factors Effecting Underground Economy in Iran (1976-2010): A Vector Error Correction Model

The underground economy is a global phenomenon that exists in all countries of the world and it has attracted the attention of many researchers and government organizations in different countries. Having information of the size of the underground economy is very important from the aspect of tax evasion, the effectiveness of monetary and fiscal policy, economic growth and income distribution. Evidence indicates the increased share of underground economy in most countries of the world. In broad concept, the underground economy is those activities which are not included in the national accounts. Removing some of the economic activities from the national accounts which are used as a measure of a country's output of goods and services during an accounting period creates numerous problems. The main purpose of this paper is to estimate the size of the underground economy in the period 1976 to 2010 by the method of Tanzi and identify factors influencing it by the method of Johansen-Juselius and (VECM). The results show that the underground economy allocated a high volume of the country's economy to itself and shows a growing trend in the time period of study. In addition, both size of government and revenue have a significant and positive relationship with the size of the underground economy.