Investigating the impact of tourism market diversification on the shadow economy in OECD and non-OECD countries

The primary aim of this study is to examine the effects of tourism market diversification on the shadow economy. Method of Moments Quantile Regression (MMQREG) approach has been used in the analysis of 70 countries, including 27 OECD countries and 43 non-OECD countries. Using two different shadow economy indicators as dependent variables, the results reveal that tourism market diversification raises shadow economy activities in the total sample. In OECD countries, an increase in tourism market diversification leads to a decline in the size of the shadow economy, whereas in non-OECD countries, greater tourism market diversification contributes to a rise in shadow economy activities. The results also show that greater financial development reduces the size of the shadow economy and while an appreciation of the real effective exchange rate decreases the informal sector for non-OECD countries this effect is ambiguous for OECD nations. Based on these findings, we suggest promoting tourism market diversification in OECD countries and carefully designing tourism policies in non-OECD countries to reduce the size of the shadow economy. By extending beyond average effects to capture marginal impacts across quantiles, our study offers significant contributions to the literature and provides valuable insights for the evaluation of tourism policies.