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Decentralization and the shadow economy: Oates meets Allingham--Sandmo

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  • Andreas Buehn
  • Christian Lessmann
  • Gunther Markwardt

Abstract

This article studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) decentralization enhancing public sector efficiency ( efficiency effect ), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities ( deterrence effect ). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. We find no robust evidence of the efficiency effect.

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File URL: http://hdl.handle.net/10.1080/00036846.2012.671923
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 18 (June)
Pages: 2567-2578

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Handle: RePEc:taf:applec:v:45:y:2013:i:18:p:2567-2578

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  1. 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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  16. Fan, C. Simon & Lin, Chen & Treisman, Daniel, 2009. "Political decentralization and corruption: Evidence from around the world," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 14-34, February.
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Cited by:
  1. Andreas Buehn & Mohammad Reza Farzanegan, 2013. "Impact of education on the shadow economy: Institutions matter," Economics Bulletin, AccessEcon, vol. 33(3), pages 2052-2063.
  2. Ceyhun Elgin & Oguz Oztunali, 2013. "Institutions, Informal Economy and Economic Development," Working Papers 2013/03, Bogazici University, Department of Economics.

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