National Culture and Shadow Economy in OECD Countries: A Bayesian Approach

The present research discovers the relationship between the national culture and the size of the shadow economy in OECD countries. We achieve this objective by gathering data of these countries in the period 1996–2017. As culture is a multidimensional concept, we apply Hofstede’s indices to examine different dimensions of this factor. We then use the Bayesian approach to regress the shadow economy’s size on the national culture, controlling for unemployment, Gross Domestic Product (GDP) per capita, rule of law, and tax burden. We uncover that higher individualism versus collectivism, masculinity versus femininity, power distance, and indulgence and restraint can reduce the size of this economic sector, while uncertainty avoidance and long-term versus short-term orientation positively impact the size of the shadow economy. The results of the study suggest that analysts and policymakers should consider cultural factors when investigating people’s decisions to participate in the shadow economy, through which they can better control this economic sector.