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Pollution, Shadow Economy and Corruption: Theory and Evidence

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  • Amit K. Biswas
  • Mohammad Reza Farzanegan
  • Marcel Thum

Abstract

We study how the shadow economy affects pollution and how this effect depends on corruption levels in public administration. Production in the shadow economy allows firms to avoid environmental regulation policies; a large informal sector may be accompanied by higher pollution levels. Our theoretical model predicts that controlling the levels of corruption can limit the effect of the shadow economy on pollution. We use panel data covering the period from 1999–2005 from more than 100 countries to test this theoretical prediction. Our estimates confirm that the relationship between the shadow economy and the levels of pollution are dependent on the levels of corruption. Our results hold when we control for the effects of other determinants of pollution, time varying common shocks, country-fixed effects and various additional covariates.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3630.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3630

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Keywords: environmental pollution; shadow economy; corruption; panel data;

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Citations

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Cited by:
  1. Kjetil Bjorvatn & Mohammad Reza Farzanegan, 2014. "Resource rents, power, and political stability," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201419, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Ceyhun Elgin & Ummad Mazhar, 2012. "Environmental Regulation, Pollution and the Informal Economy," Working Papers, Bogazici University, Department of Economics 2012/07, Bogazici University, Department of Economics.
  3. Buehn, Andreas & Farzanegan, Mohammad Reza, 2013. "Hold your breath: A new index of air pollution," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 104-113.
  4. Mohammad Reza Farzanegan & Tim Mennel, 2012. "Fiscal decentralization and Pollution: Institutions Matter," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201222, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  5. Eleni Stathopoulou & Dimitrios Varvarigos, 2013. "Corruption, Entry and Pollution," Discussion Papers in Economics, Department of Economics, University of Leicester 13/21, Department of Economics, University of Leicester.
  6. Andreas Buehn & Mohammad Reza Farzanegan, 2013. "Impact of education on the shadow economy: Institutions matter," Economics Bulletin, AccessEcon, vol. 33(3), pages 2052-2063.
  7. Mandal, Biswajit, 2014. "Trade Reform, Environment and Intermediation: Implication for Health Standard," MPRA Paper 56524, University Library of Munich, Germany.
  8. Tausch, Arno & Heshmati, Almas, 2014. "Testing an EU-Candidate's Place on the Maps of Global Economic, Political and Social Values: The Case of Turkey," IZA Discussion Papers 8163, Institute for the Study of Labor (IZA).
  9. Goel, Rajeev K. & Herrala, Risto & Mazhar, Ummad, 2013. "Institutional quality and environmental pollution: MENA countries versus the rest of the world," Economic Systems, Elsevier, Elsevier, vol. 37(4), pages 508-521.

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