Automation and the shadow economy

This study aims to identify a new driver of the shadow economy in the modern economy by analyzing whether automation in production is associated with this sector. Empirically, we estimate the relationship between automation in robotic operations and the shadow economy in a panel sample of 54 countries from 2002 to 2018 for three different measures of the shadow economy. We find a negative association of automation with the size of the shadow economy as a percentage of GDP. Notably, this relationship is relatively consistent after controlling for country heterogeneity, economic structure, institutional quality, and when using alternative measures of robot intensity. Overall, the findings suggest that automation might have unexpected benefits for the economy, given its negative association with the size of the shadow economy.