Judicial efficiency also amplifies the impact of financial development
on the size of the underground economy. Fig. 3 illustrates also
the interaction between financial development and judicial efficiency.
An improvement in judicial efficiency shifts the disclosure function
upwards, from γ(Ai) to the new value γ1(Ai). The thresholds Amin
and ALT decrease to the new values A'min and A'LT. Hence, financial development
(a reduction of Amin to A'min) has a larger impact on the
underground economy when the judicial system is efficient. The reason
is that when the courts are efficient, financial development induces
entrepreneurs to disclose a larger fraction of their assets, so
that the underground economy decreases by a larger amount