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The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

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Abstract

This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 42 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is weaker in high-income, high-tax, low-corruption countries that provide public services which make it worthwhile for firms to operate in the official economy despite growing competitive pressure.

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  • Liliane Karlinger, 2008. "The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?," Vienna Economics Papers vie0802, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie0802
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    References listed on IDEAS

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    Cited by:

    1. Andreev A.S. & Andreeva O.V. & Bondareva G.V. & Osyak V.V., 2018. "Understanding the Underground Economy," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 2), pages 814-822.
    2. Baumann Florian & Friehe Tim, 2016. "Competitive Pressure and Corporate Crime," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 647-687, April.
    3. Luisanna Onnis & Patrizio Tirelli, 2015. "Shadow economy: Does it matter for money velocity?," Empirical Economics, Springer, vol. 49(3), pages 839-858, November.
    4. Mazhar, Ummad & Méon, Pierre-Guillaume, 2017. "Taxing the unobservable: The impact of the shadow economy on inflation and taxation," World Development, Elsevier, vol. 90(C), pages 89-103.
    5. Liliane Karlinger, 2014. "The “Dark Side” of Deregulation: How Competition Affects the Size of the Shadow Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 293-321, April.
    6. Dr. Selami Guney, 2011. "The Role Of Accounting And Certified Public Accountants In The Prevention Of The Informal Economy In Turkey," Far East Journal of Psychology and Business, Far East Research Centre, vol. 4(3), pages 27-44, July.
    7. Gokalp, Omer N. & Lee, Seung-Hyun & Peng, Mike W., 2017. "Competition and corporate tax evasion: An institution-based view," Journal of World Business, Elsevier, vol. 52(2), pages 258-269.
    8. González-Fernández, Marcos & González-Velasco, Carmen, 2015. "Analysis of the shadow economy in the Spanish regions," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 1049-1064.

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    More about this item

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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