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The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

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  • Karlinger, Liliane

Abstract

Summary This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 37 (2009)
Issue (Month): 10 (October)
Pages: 1600-1611

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Handle: RePEc:eee:wdevel:v:37:y:2009:i:10:p:1600-1611

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

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Keywords: shadow economy competition corruption OECD Asia Eastern Europe;

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  1. Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
  2. Gonzalez, Alvaro S. & Lamanna, Francesca, 2007. "Who fears competition from informal firms ? evidence from Latin America," Policy Research Working Paper Series 4316, The World Bank.
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  8. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
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  12. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," NBER Working Papers 10269, National Bureau of Economic Research, Inc.
  13. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  14. Jamasb, Tooraj, 2006. "Between the state and market: Electricity sector reform in developing countries," Utilities Policy, Elsevier, vol. 14(1), pages 14-30, March.
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  16. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  17. James Alm & Benno Torgler, 2004. "Culture Differences and Tax Morale in the United States and in Europe," CREMA Working Paper Series 2004-14, Center for Research in Economics, Management and the Arts (CREMA).
  18. Liliane Karlinger, 2008. "Globalizing Tax Evasion: How Competition Affects the Size of the Underground Economy," Vienna Economics Papers 0801, University of Vienna, Department of Economics.
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Cited by:
  1. Dr. Selami Guney, 2011. "The Role Of Accounting And Certified Public Accountants In The Prevention Of The Informal Economy In Turkey," Far East Journal of Psychology and Business, Far East Research Centre, vol. 4(3), pages 27-44, July.

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