Dimensions of Ethnic Diversity and Underground Economic Activity: Cross-country Evidence

Document Type



ethnic diversity; ethnic inequality; underground economy; income inequality; government

Identifier Data



Sage Journals

Publication Source

Public Finance Review


Cultural and ethnic factors crucially affect economic agents’ propensities toward law-abiding behavior and operating in the underground economy is an important, widely prevalent, aspect. However, there are many dimensions of ethnic diversity, and the relative influences of each on underground behavior are not well articulated. This article uniquely considers the effects of five dimensions of ethnic/cultural diversity, including ethnic income inequality, ethnic–linguistic fragmentation, cultural fragmentation, ethnolinguistic polarization, and ethnic–linguistic segregation, on the international shadow economy. Placing the empirical analysis in the context of the empirical determinants of the shadow economy, results show income inequality across ethnic groups increases underground activity across different modeling variations, while the effects of the other dimensions are statistically insignificant. This unique finding underscores the notion that not all dimensions of ethnic diversity are alike when it comes to their influences on the informal sector.