Abstract
While governance is recognized as critical in reducing the shadow economy, the specific impacts of different governance dimensions at the subnational level remain underexplored. This study investigates how six dimensions of local governance quality affect the shadow economy across 63 provinces in Vietnam from 2010 to 2021. Using panel data and fixed-effects regressions with robust standard errors, the results reveal that improved control of corruption and simplified administrative procedures have the strongest negative associations with the size of the shadow economy, followed by transparency and vertical accountability. Participation at the local level and public service delivery also exhibit significant but smaller effects. These findings highlight the importance of disaggregating governance quality in designing effective formalization policies. By identifying which governance aspects matter most, the study provides empirical evidence for targeted provincial reforms to reduce informality, enhance fiscal sustainability, and promote equitable development in Vietnam
