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Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo

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  • Andreas Bühn
  • Christian Lessmann
  • Gunther Markwardt

Abstract

This paper 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. Remarkably, we find no robust evidence of the efficiency effect.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-08/cesifo1_wp3551.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3551.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3551

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Keywords: decentralization; shadow economy;

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References

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  1. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CESifo Working Paper Series 1653, CESifo Group Munich.
  2. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 11, pages 109-149, 05.
  3. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, National Bureau of Economic Research, Inc, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  4. Schneider, Friedrich, 2005. "Shadow economies around the world: what do we really know?," European Journal of Political Economy, Elsevier, Elsevier, vol. 21(3), pages 598-642, September.
  5. Klarita G�rxhani, 2004. "The Informal Sector in Developed and Less Developed Countries: A Literature Survey," Public Choice, Springer, Springer, vol. 120(3_4), pages 267-300, 09.
  6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 15(1), pages 222-79, April.
  7. David E. A. Giles, 1999. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers, Department of Economics, University of Victoria 9905, Department of Economics, University of Victoria.
  8. Thushyanthan Baskaran & Lars P. Feld, 2009. "Fiscal Decentralization and Economic Growth in OECD Countries: Is there a Relationship?," CESifo Working Paper Series 2721, CESifo Group Munich.
  9. Désirée Teobaldelli, 2011. "Federalism and the shadow economy," Public Choice, Springer, Springer, vol. 146(3), pages 269-289, March.
  10. Fan, C. Simon & Lin, Chen & Treisman, Daniel, 2009. "Political decentralization and corruption: Evidence from around the world," Journal of Public Economics, Elsevier, Elsevier, vol. 93(1-2), pages 14-34, February.
  11. Benno Torgler & Friedrich Schneider & Christoph A. Schaltegger, 2008. "Local Autonomy, Tax Morale and the Shadow Economy," CREMA Working Paper Series, Center for Research in Economics, Management and the Arts (CREMA) 2008-24, Center for Research in Economics, Management and the Arts (CREMA).
  12. G. Gulsun Arikan, 2004. "Fiscal Decentralization: A Remedy for Corruption?," International Tax and Public Finance, Springer, Springer, vol. 11(2), pages 175-195, 03.
  13. Klovland, Jan Tore, 1984. " Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 86(4), pages 423-39.
  14. Schneider, Friedrich G., 2007. "Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 1(9), pages 1-66.
  15. Michael Alexeev & Luba Habodaszova, 2007. "Decentralization, Corruption, and the Unofficial Economy," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2007-008, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  16. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2008. "Governance matters VII : aggregate and individual governance indicators 1996-2007," Policy Research Working Paper Series 4654, The World Bank.
  17. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  18. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  19. Frey, Bruno S & Pommerehne, Werner W, 1984. "The Hidden Economy: State and Prospects for Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 30(1), pages 1-23, March.
  20. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 77-114, March.
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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, Bogazici University, Department of Economics 2013/03, Bogazici University, Department of Economics.

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