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Pollution, shadow economy and corruption: Theory and evidence

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  • Biswas, Amit K.
  • Farzanegan, Mohammad Reza
  • Thum, Marcel

Abstract

We study how the shadow economy affects pollution and how this effect depends on corruption levels in public administration. Production in the shadow economy allows firms to avoid environmental regulation policies; a large informal sector may be accompanied by higher pollution levels. Our theoretical model predicts that controlling the levels of corruption can limit the effect of the shadow economy on pollution. We use panel data covering the period from 1999 to 2005 in more than 100 countries to test this theoretical prediction. Our estimates confirm that the relationship between the shadow economy and the levels of pollution are dependent on the levels of corruption. Our results hold when we control for the effects of other determinants of pollution, time varying common shocks, country-fixed effects and various additional covariates.

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Bibliographic Info

Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 75 (2012)
Issue (Month): C ()
Pages: 114-125

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Handle: RePEc:eee:ecolec:v:75:y:2012:i:c:p:114-125

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Web page: http://www.elsevier.com/locate/ecolecon

Related research

Keywords: Environmental pollution; Shadow economy; Corruption; Panel data;

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Cited by:
  1. Ceyhun Elgin & Ummad Mazhar, 2012. "Environmental Regulation, Pollution and the Informal Economy," Working Papers 2012/07, Bogazici University, Department of Economics.
  2. Mohammad Reza Farzanegan & Tim Mennel, 2012. "Fiscal decentralization and Pollution: Institutions Matter," MAGKS Papers on Economics 201222, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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