Is the informal economic activity a determinant of environmental quality?

Abstract

This study aims to investigate whether the size of the informal economic activity is a determinant of the environmental quality in the case of Turkey. First, the MIMIC model approach will be used to estimate the size of the informal economic activity. Second, time series analysis will be conducted for the period from 1970 to 2014, in order to examine the effect of the size of the informal economic activity on the environmental quality by conducting Carrion-i-Silvestre et al. (Economet Theor 25:1754, 2009) unit root tests, Bound test and Maki (Econ Model 29:2011-2015, 2012) cointegration tests that allow structural breaks will be employed prior to the DOLS, FMOLS, and ARDL approaches for long-run and short-run models. The results suggest that informal economic activity is a positively significant determinant on the environmental quality. Moreover, this paper suggests that both formal and informal economies have significant impact on environmental quality. However, formal economy exerts positively higher effects on the environmental quality compared to informal economy. Turkish authorities need to pay more attention on both formal and informal economic activities to prevent environmental degradation in Turkey.