ABSTRACT
The underground economy, which is that part of a country’s economic activity that is not officially recorded and is untaxed by the government, is becoming increasingly important in developing and transition economies (Schneider 2005). On the plus side, the underground economy fosters entrepreneurship and provides jobs, goods, and services, especially for the poor (Venkatesh 2006). It can also assist in cutting through bureaucratic red tape and provide an “alternative path” to foster economic development (De Soto 1990). The downside of the underground economy is that it is often associated with illegal activities such as prostitution, drug trafficking, and illegal gambling, which pose significant challenges to economic and social governance (Dreher and Schneider 2010; Schneider and Enste 2000).
