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Corruption and the Shadow Economy

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Author Info
Jay Pil Choi ()
Marcel Thum ()

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Abstract

This 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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 633.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_633

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Related research
Keywords: corruption; shadow economy; official economy; self-selection.;

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Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Daron Acemoglu & Thierry Verdier, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March. [Downloadable!] (restricted)
    Other versions:
  2. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hibbs, Douglas A., 2009. "Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy," MPRA Paper 15897, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Santiago Sanchez-Pages & Stephane Straub, 2006. "The Emergence of Institutions," ESE Discussion Papers 148, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  3. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CREMA Working Paper Series 2006-01, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
    Other versions:
  4. Daniel Mejía & Carlos Esteban Posada, 2007. "Informalidad: teoría e implicaciones de política," BORRADORES DE ECONOMIA 004024, BANCO DE LA REPÚBLICA. [Downloadable!]
    Other versions:
  5. Raghbendra Jha & T. Palanivel, 2007. "Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region," ASARC Working Papers 2007-02, Australian National University, Australia South Asia Research Centre. [Downloadable!]
    Other versions:
  6. Douglas Hibbs & Violeta Piculescu, 2005. "Institutions, Corruption and Tax Evasion in the Unofficial Economy," Public Economics 0508003, EconWPA. [Downloadable!]
  7. Bouwe Dijkstra, . "Good And Bad Equilibria With The Informal Sector," Discussion Papers 06/01, University of Nottingham, School of Economics. [Downloadable!]
  8. Hibbs Jr., Douglas A. & Piculescu, Violeta, 2005. "Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Uno¢ cial Economy," Working Papers in Economics 173, Göteborg University, Department of Economics, revised 12 Jun 2006. [Downloadable!]
  9. Cemile Yavas, 2007. "The Ghost of Corruption," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1619-1619. [Downloadable!] (restricted)
  10. Maria Lacko, 2007. "Interrelationships of the hidden economy and some visible segments of the labour market," IEHAS Discussion Papers 0707, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  11. Pratap, Sangeeta & Quintin, Erwan, 2006. "The Informal Sector in Developing Countries: Output, Assets and Employment," Working Papers RP2006/130, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  12. Maurizio Bovi, 2006. "The Cyclical Behavior of Shadow and Regular Employment," ISAE Working Papers 62, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
    Other versions:
  13. Friedrich Schneider, 2006. "Shadow Economies and Corruption All Over the World: What Do We Really Know?," IZA Discussion Papers 2315, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  14. Buehn, Andreas & Schneider, Friedrich, 2009. "Corruption and the Shadow Economy: A Structural Equation Model Approach," IZA Discussion Papers 4182, Institute for the Study of Labor (IZA). [Downloadable!]
  15. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2005. "How do Institutions Affect Corruption and the Shadow Economy?," Public Economics 0502012, EconWPA, revised 24 Feb 2005. [Downloadable!]
  16. Bojan Nastav & Štefan Bojnec, 2008. "Small Businesses and the Shadow Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(01-02), pages 68-81, January. [Downloadable!]
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