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Corruption And The Shadow Economy

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  • Jay Pil Choi
  • Marcel Thum

Abstract

This article develops a simple framework for analyzing the links between corruption and the unofficial economy and their implications for the official economy. In a model of self-selection with heterogeneous entrepreneurs, we show that the entrepreneurs' option to flee to the underground economy constrains a corrupt official's ability to introduce distortions to the economy for private gains. The unofficial economy thus mitigates government-induced distortions and, as a result, leads to enhanced economic activities in the official sector. In this sense, the presence of the unofficial sector acts as a complement to the official economy instead of as a substitute. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 46 (2005)
Issue (Month): 3 (08)
Pages: 817-836

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Handle: RePEc:ier:iecrev:v:46:y:2005:i:3:p:817-836

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References

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  1. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June.
  2. Acemoglu, D. & Verdier, T., 1997. "The Choice between Market Failures and Corruption," DELTA Working Papers 97-06, DELTA (Ecole normale supérieure).
  3. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  4. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  5. Christian R. Ahlin, 2001. "Corruption: Political Determinants and Macroeconomic Effects," Vanderbilt University Department of Economics Working Papers 0126, Vanderbilt University Department of Economics.
  6. Eric Friedman & Simon Johnson & Daniel Kaufmann & Pablo Zoido-Lobaton, 1999. "Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69," Departmental Working Papers 199921, Rutgers University, Department of Economics.
  7. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 427-443, March.
  8. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  9. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, vol. 2(3), pages 265-270, July.
  10. Novos, Ian E & Waldman, Michael, 1984. "The Effects of Increased Copyright Protection: An Analytic Approach," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 236-46, April.
  11. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  12. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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