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Corruption and the Shadow Economy: An Empirical Analysis

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  • Dreher, Axel

    ()
    (Heidelberg University)

  • Schneider, Friedrich

    ()
    (University of Linz)

Abstract

This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.

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File URL: http://ftp.iza.org/dp1936.pdf
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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1936.

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Length: 39 pages
Date of creation: Jan 2006
Date of revision:
Publication status: published in: Public Choice, 2010, 144 (1), 215–238
Handle: RePEc:iza:izadps:dp1936

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Keywords: regulation; shadow economy; corruption; tax burden;

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References

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  1. Hans Pitlik & Björn Frank & Mathias Firchow, 2010. "The demand for transparency: An empirical note," The Review of International Organizations, Springer, Springer, vol. 5(2), pages 177-195, June.
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  3. Juan Botero & Simeon Djankov & Rafael LaPorta & Florencio López-de-Silanes & Andrei Shleifer, . "The Regulation of Labor," Working Paper 19483, Harvard University OpenScholar.
  4. Axel Dreher & Lars Siemers, 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 05-113, KOF Swiss Economic Institute, ETH Zurich.
  5. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "The Quality of Government," Working Paper 19452, Harvard University OpenScholar.
  6. Jay Pil Choi & Marcel Thum, 2005. "Corruption And The Shadow Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 817-836, 08.
  7. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2005. "How Do Institutions Affect Corruption and the Shadow Economy," Discussion Papers, Exeter University, Department of Economics 0505, Exeter University, Department of Economics.
  8. Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei & Lopez de Silanes, Florencio, 2001. "The regulation of entry," Policy Research Working Paper Series 2661, The World Bank.
  9. Naci Mocan, 2008. "What Determines Corruption? International Evidence From Microdata," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 46(4), pages 493-510, October.
  10. Hindriks, J. & Keen, M. & Muthoo, A., 1998. "Corruption, Extortion and Evasion," Discussion Papers, Exeter University, Department of Economics 9809, Exeter University, Department of Economics.
  11. Alesina, Alberto, et al, 2003. " Fractionalization," Journal of Economic Growth, Springer, Springer, vol. 8(2), pages 155-94, June.
  12. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  13. 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.
  14. Johanna D'Hernoncourt & Pierre-Guillaume Méon, 2012. "The not so dark side of trust: Does trust increase the size of the shadow economy?," ULB Institutional Repository 2013/98287, ULB -- Universite Libre de Bruxelles.
  15. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1999. "Corruption, public finances, and the unofficial economy," Policy Research Working Paper Series 2169, The World Bank.
  16. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(3), pages 1320-1346, September.
  17. Douglas Hibbs & Violeta Piculescu, 2005. "Institutions, Corruption and Tax Evasion in the Unofficial Economy," Public Economics, EconWPA 0508003, EconWPA.
  18. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  19. Toke S. Aidt & Martin Gassebner, 2010. "Do Autocratic States Trade Less?," World Bank Economic Review, World Bank Group, World Bank Group, vol. 24(1), pages 38-76, January.
  20. Friedrich Schneider, 2004. "Shadow Economies around the World: What do we really know?," IAW Discussion Papers, Institut für Angewandte Wirtschaftsforschung (IAW) 16, Institut für Angewandte Wirtschaftsforschung (IAW).
  21. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," Public Choice, Springer, Springer, vol. 122(1), pages 69-97, January.
  22. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, Elsevier, vol. 76(3), pages 459-493, June.
  23. 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.
  24. Pierre-Guillaume Méon & Khalid Sekkat, 2004. "Does the Quality of Institutions Limit the MENA's Integration in the World Economy?," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 27(9), pages 1475-1498, 09.
  25. Pierre-Guillaume Méon & Khalid Sekkat, 2004. "Does the quality of institutions limit MENA integration in the world economy?," ULB Institutional Repository 2013/7360, ULB -- Universite Libre de Bruxelles.
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