Previous studies show that the environmental quality is significantly influenced by corruption and the hidden economy separately. However, what is the impact of their interaction effect on environmental quality? Based on Multiple Indicators Multiple Causes (MIMIC) model, this study calculates the scale of hidden economy in Chinese provinces firstly. Then, we apply the method of spatial econometrics to analyze the interaction effect of corruption and the hidden economy on environmental pollution with China's provincial panel data from 1998 to 2017. The results indicate that the interaction effect between corruption and hidden economy significantly increases pollutant discharge, suggesting that both anti-corruption and control of the hidden economy may improve environmental quality directly and indirectly.
Keywords: corruption; environmental pollution; hidden economy; spatial econometric analysis.