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Decentralization, Corruption, and the Unofficial Economy

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Author Info

  • Michael Alexeev

    ()
    (Indiana University Bloomington)

  • Luba Habodaszova

    ()
    (City University/VSM, Bratislava, Slovakia)

Abstract

We analyze the implications of decentralization for the incentives of local governments to provide productivity enhancing local public goods and extort bribes from local entrepreneurs. We show that an increase in the share of locally raised tax revenue left with the local government raises its incentives to provide public goods and brings more entrepreneurs into the official economy. Corruption, measured by the size of bribes that local officials charge entrepreneurs for issuing licenses for operating officially, may increase or decrease, depending on the extent to which public goods enhance the entrepreneur’s productivity. The tests using cross-sectional country-level data support the model’s implications.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2007/CAEPR2007-008.pdf
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Bibliographic Info

Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2007-008.

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Length: 37 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:inu:caeprp:2007008

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Keywords: decentralization; local public goods; corruption; unofficial economy;

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Cited by:
  1. Roberto Dell'Anno & Désirée Teobaldelli, 2012. "Keeping both Corruption and the Shadow Economy in Check: The Role of Decentralization," Working Papers 1213, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  2. Thanh Thuy Vu & Messaoud Zouikri & Bruno Deffains, 2012. "The Interrelationship between Formal and Informal Delcentralization and its Impact on Sub-Central Governance Performance: The Case of Vietnam," CESifo Working Paper Series 3714, CESifo Group Munich.
  3. Andreas Buehn & Christian Lessmann & Gunther Markwardt, 2013. "Decentralization and the shadow economy: Oates meets Allingham--Sandmo," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2567-2578, June.

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