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Corruption with Heterogeneous Enforcement Agents in the Shadow Economy

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  • Pinaki Bose
  • Luciana Echazu

Abstract

We analyze the relationship between the underground (or shadow) economy and the formal or legal sector in the presence of corruption in both sectors. Firms choose between operating in the legal and in the underground economy. With morally heterogeneous law enforcement agents monitoring the underground economy, the equilibrium in both sectors depends critically on the incentives of honest enforcers and on the proportion of such agents. In particular, we show that an increase in the proportion of honest agents monitoring the shadow economy may have the adverse effect of increasing its size, together with concomitant increases in negative externalities.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 163 (2007)
Issue (Month): 2 (June)
Pages: 285-296

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_285:cwheai_2.0.tx_2-1

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Cited by:
  1. Bouwe R. Dijkstra, 2011. "Good and Bad Equilibria with the Informal Sector," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 668-685, December.
  2. Mishra, Ajit & Ray, Ranjan, 2010. "Informality, Corruption, and Inequality," Department of Economics Working Papers 22127, University of Bath, Department of Economics.

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