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Globalizing Tax Evasion: How Competition Affects the Size of the Underground Economy

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Abstract

The underground economy expanded substantially during the late 1990s, both in the industrialized and the developing world. I argue that this development is a response to the sharp increase in market competition worldwide. I develop a parsimonious oligopoly model of free entry and free sector choice, where the intensity of competition is captured by the degree of (exogenous) product differentiation. Operating in the underground economy reduces variable costs, but comes at the risk of being detected and fined. The keener is competition, the higher is the pressure to reduce costs, and the more pervasive is the underground economy.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0801.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0801.

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Date of creation: May 2008
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Handle: RePEc:vie:viennp:0801

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Web page: http://www.univie.ac.at/vwl

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  1. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, April.
  2. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers 3874, C.E.P.R. Discussion Papers.
  3. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May.
  4. Schneider, Friedrich, 2005. "Shadow economies around the world: what do we really know?," European Journal of Political Economy, Elsevier, vol. 21(3), pages 598-642, September.
  5. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  6. 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, vol. 76(3), pages 459-493, June.
  7. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
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Cited by:
  1. Liliane Karlinger, 2008. "The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?," Vienna Economics Papers 0802, University of Vienna, Department of Economics.

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