The size and character of the informal sector and its shadow economy in Mongolia

The economic shadow is associated with the decisions of firms orhouseholds who misreport their activity in order to avoid observation. Those in the economic shadow may benefit materially, by evading tax or social insurance obligations, or by ignoring the requirementsof costly regulations.Participationin the economic shadow will involve tradeoffs for these actors however, since there are also costs associated with shadow participation. These costs include potential penalties for non-compliance, as well as the possibility ofreducedaccess toboth public and private goods, such as pensions, police protection, and financing. Understanding how firms view these tradeoffs is fundamentalto understandingthe shadow economy’s effect on the well-being of participants and its significance forthe overall economy.