A shadow on democracy? The shadow economy and government responsiveness

Abstract Government responsiveness is a key feature and justification for democracy. Yet, previous studies show that the ability of governments to deliver responsive policies critically depends on the availability of resources. This study suggests that the shadow economy hurts democratic responsiveness because it reduces government revenues and decreases the reliability of economic statistics. Governments facing lower resources then respond to wider economic constraints and not to their publics. Using Eurobarometer data to evaluate public opinion in 15 European democracies and data on welfare generosity to measure policy outputs, this study finds that larger submerged economies correspond to less responsive governments. Additionally, the empirical analysis highlights that the shadow economy makes welfare systems less generous and taxation rates more demanding. These novel results have important implications for our understanding of democracy and help us clarify the conditions under which governments are more or less likely to deliver responsive policies. Finally, these results demonstrate the importance of studying the political consequences of the shadow economy.