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Regional Differences in the Underground Economy in Croatia

The scope of research in this paper is regional differences in the size of underground economy in Croatia and the main factors determining these differences. The current theoretical and empirical research on the subject of the underground economy highlights several leading determinants of the occurrence of the underground economy. The most frequently noted are the tax burden, structural factors (economic, demographic, educational structure of the economy), legislative system complexity, public services quality and labour market conditions. This paper attempts to incorporate as many of the stated factors as possible in order to establish the main determinants of the occurrence of the regional underground economy. Accordingly, the main hypothesis of this paper follows this reasoning, and it is the following: the economic structure of the economy and the tax burden are the most important factors explaining the occurrence of the regional differences in the underground economy in Croatia. The hypothesis in this paper has been confirmed by the regression analysis. The variable approximating the tax burden has a positive value, interpreted in a way that increases in the tax burden in a given region results in higher share of the underground economy in that region. On the other hand, the regional economy structure has also been shown as significant as an explanation for the regional differences in the underground economy. A higher proportion of the tertiary sector implies higher share of the underground economy in various Croatian regions. Out of other variables influencing the regional differences of underground economy, regional gross domestic product per capita and educational and demographic structure variables are shown to be significant as well.

underground economy; determinants of regional differences in underground economy; Croatia

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