Corruption and the Shadow Economy
AbstractThis paper develops a simple framework to analyze 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 rather than a substitute.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 633.
Date of creation: 2002
Date of revision:
corruption; shadow economy; official economy; self-selection.;
Other versions of this item:
- D9 - Microeconomics - - Intertemporal Choice
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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