Estimating the shadow economy in Bulgaria using the multiple indicators multiple causes model

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Abstract

This paper aims to contribute to the existing literature on the shadow economy in Bulgaria, both methodologically and empirically, by providing an up-to-date evaluation of its size. The study of the temporal shifts in the shadow economy size is expected to facilitate the evaluation of unreported economic activities and assist the design of more effective government policies that may enhance revenue collection, economic efficiency, and institutional trust. The multiple indicators multiple causes (MIMIC) model for evaluating the shadow economy is utilized as a methodological approach that explores the dynamics of macroeconomic indicators related to both labour market and money market variables. Empirical estimates of the shadow economy size for the period 2003–2024 are obtained by a system of simultaneous equations. The results obtained confirm that the size of the shadow economy persistently keeps quite high levels in Bulgaria during the covered period of time: between 32 percent and 38 percent. The main factors contributing to this have been identified, namely the ratio of government employment to the labour force, the unemployment rate, and the ratio of subsidies to gross domestic product (GDP). The results indicate that expanding the role of state institutions, encouraging participation in the formal labour market, and a better targeted implementation of subsidy policies have the potential to significantly reduce the shadow economy in the country.

Keywords: Shadow Economy, Econometric Analysis, MIMIC Model, Bulgaria

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: H26, O17, C30

Received: 06.10.2025
Revised: 21.01.2026; 09.03.2026
Accepted: 07.04.2026
Published online: 10.04.2026

How to cite this paper: Dimitrova, V. (2026). Estimating the shadow economy in Bulgaria using the multiple indicators multiple causes model. Journal of Governance and Regulation, 15(2), 253–266. https://doi.org/10.22495/jgrv15i2art22