Intelligence and shadow economy: A cross-country empirical assessment

• This study explores the effect of intelligence on shadow economy.
• Intelligence is negatively associated with shadow economy.
• The effect of intelligence remains robust after controlling for other factors.
• The authors control for endogeneity of intelligence and for the presence of outliers.

This paper empirically assesses the influence of intelligence on a shadow economy, using data from 158 countries, over the period 1999–2007. The results provide strong evidence for the claim that intelligence is negatively associated with an underground economy. This paper establishes that, on average, a one standard deviation increase in IQ is associated with an 8.5 percentage point reduction in a shadow economy relative to GDP. The negative effect of intelligence remains intact when controlled for conventional antecedents of a shadow economy.