Regulatory Quality, Digital Readiness, and the Shadow Economy: A Two-Way ANOVA of 30 European Countries

This paper looks at how Regulatory Quality and Network Readiness Index connect to the size of Shadow Economy in 30 European countries in the year of 2022. To do so, the analysis employs more than one quantitative design. Two-way analysis of variance (Type I and Type II sums of squares), post-hoc pairwise comparisons, and k-means clustering are combined together. The Results show that higher regulatory quality and higher digital readiness are each associated with smaller shadow economies. Their effects are also additive rather than interactive. Looking at the estimated marginal means, the highest shadow-economy levels appear in countries that score low on both dimensions, while the lowest appear in those scoring high on both. A structural feature of the data, is the absence of cases that combine low regulatory quality with high network readiness. This suggests an institutional threshold for digitalization so it can translate into formalization. Clusters based on joint regulatory and digital profiles align closely with shadow economy outcomes, offering a practical typology for policy targeting. The study concludes that strong institutions are a precondition for digital tools and infrastructure so to curb shadow economy effectively. Policy sequencing that first consolidates regulatory credibility, and then scales digital infrastructure, e-government, traceable payments, and digital skills, is likely to produce the largest and most durable reductions in the shadow economy activity. The approach and results provide actionable guidance for European policymakers seeking to reduce shadow economy while advancing inclusive, digitally enabled growth.