This paper analyses how rule of law, property rights, and other political indices affect the shadow economy, using country panel data. The literature strongly emphasizes the importance of these factors to know the level and changes of shadow economy. However, the limited number of researches uses panel country data with a relatively small number of observations, and hardly any paper has investigated rule of law and property rights and provides evidence using within country data. We use 34 countries data for 8 years from 2000-2007 that measure political indices we find strong support that its increase (improve) leads to a smaller shadow economy. Countries with some common economy features, they have normally been studied and analyzed jointly.

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