Our analysis of the relation between financial development and
the underground economy needs to address the issue of potential
reverse causality and endogeneity of financial development FD in
Eq. (13). In particular, an increase in underground activities (e.g.
due to an increase in general taxation) reduces the demand for credit,
hampering financial market growth. Similarly, low GDP growth might
reduce the demand for loans and financial development, while at the
same time increasing underground activities. This implies that simply
observing that low financial development is associated with a high
level of underground activities does not necessarily mean that low
financial development actually causes more underground activities.