Underground Economy and its causes: a Case Study of Iran

Document Type : Research Article



The underground economy is a phenomenon that all countries have to deal with it. The researches display that the size of activities in the underground economy are fairly large and these activities are the causes of  the most economic disturbances; therefore, its estimation is important in the tax gap realization, the effectiveness of monetary and fiscal policies, economic growth and income distribution aspects.
At first, this study explains the concept of underground economy and its causes; then the unfavorable effects of the underground economy and its estimation methods are illustrated briefly. In empirical section, first the size of the underground economic activities for Iran from 1350 to 1389 was estimated by using monetary method in the three scenarios. Second, the impacts of some variables such as tax burden, inflation, income inequality, size of the government and the exchange rate gap on the underground economy have been investigated by econometric model.
The empirical results estimate the average size of the underground economy in the three scenarios 13.26, 15.05 and 15.71 percent of GDP, respectively. Furthermore, the estimation shows that the tax burden, inflation, the income inequality and the size of the government have significantly positive effects on the underground economy; in which, the tax burden has had the largest effect.