Abstract:
In this paper, we study the impact of oil price shocks on the incidence of protest over the period 1991-2015. Our results indicate that negative oil price shocks are followed by an uptick in the number of protests and that a higher initial size of the shadow economy allows to mitigate the negative consequences of low oil prices on the likelihood of protest. To explain these results, we show that negative oil price shocks lead to a significant increase in the size of the shadow economy in highly oil dependent countries and that this countercyclical behavior is largely due to oil-price-driven income shocks. In our estimations, a decrease in the GDP per capita by one percentage point increases the shadow economy by 0.54 percentage points. This suggest that the shadow economy's capacity to absorb persistent oil price fluctuations without provoking political unrest, should regard it as a mitigation tool rather than an economic burden.
